An analysis of the stock market produces the following information about the returns of two stocks: $\begin{array}{ll}&\text { Stock } 1 \text { Stock } 2\\\begin{array}{ll}\text {Expected Returns }\\\text { Standard Deviations}\end{array}&\begin{array}{|cc|}\hline 15 \% & 18 \% \\20 & 32 \\\hline\end{array}\end{array}$
Assume that the returns are positively correlated, with $\rho$ ₁₂ = 0.80.
a. Find the mean and standard deviation of the return on a portfolio consisting of an equal investment in each of the two stocks.
b. Suppose that you wish to invest $1 million. Discuss whether you should invest your money in stock 1, stock 2, or a portfolio composed of an equal amount of investments on both stocks.

Question

An analysis of the stock market produces the following information about the returns of two stocks:

\begin{array}{ll}&\text { Stock } 1 \text { Stock } 2\\\begin{array}{ll}\text {Expected Returns }\\\text { Standard Deviations}\end{array}&\begin{array}{|cc|}\hline 15 \% & 18 \% \\20 & 32 \\\hline\end{array}\end{array}

Assume that the returns are positively correlated, with

\rho

₁₂ = 0.80.
a. Find the mean and standard deviation of the return on a portfolio consisting of an equal investment in each of the two stocks.
b. Suppose that you wish to invest $1 million. Discuss whether you should invest your money in stock 1, stock 2, or a portfolio composed of an equal amount of investments on both stocks.

Quizplus · Accepted Answer

The Answer of An analysis of the stock market produces the following information about the returns of two stocks: $\begin{array}{ll} &\text { Stock } 1 \text { Stock } 2\ \begin{array}{ll} \text {Expected Returns }\\text { Standard Deviations} \end{array}&\begin{array}{|cc|} \hline 15 \% & 18 \% \ 20 & 32 \ \hline \end{array} \end{array}$ Assume that the returns are positively correlated, with $\rho$₁₂ = 0.80. a. Find the mean and standard deviation of the return on a portfolio consisting of an equal investment in each of the two stocks. b. Suppose that you wish to invest $1 million. Discuss whether you should invest your money in stock 1, stock 2, or a portfolio composed of an equal amount of investments on both stocks.

An Analysis of the Stock Market Produces the Following Information