An analysis of the stock market produces the following information about the returns of two stocks: $\begin{array}{lcc}
& \text { Stock } 1 & \text { Stock } 2 \
\hline \text { Expected Returns } & 15 \% & 18 \% \
\text { Standard Deviations } & 20 & 32 \
\hline & &
\end{array}$ 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: $\begin{array}{lcc} 
& \text { Stock } 1 & \text { Stock } 2 \
\hline \text { Expected Returns } & 15 \% & 18 \% \
\text { Standard Deviations } & 20 & 32 \
\hline  & &
\end{array}$ 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: $\begin{array}{lcc} 
& \text { Stock } 1 & \text { Stock } 2 \
\hline \text { Expected Returns } & 15 \% & 18 \% \
\text { Standard Deviations } & 20 & 32 \
\hline  & &
\end{array}$ 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