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Stock X has an expected return of 8% and the standard deviation of the expected return is 9%. Stock Z has an expected return of 10% and the standard deviation of the expected return is 7%. The correlation between the returns of the two stocks is +0.5. These are the only two stocks in a hypothetical world.

A. What is the expected return and the standard deviation of a portfolio consisting of 100% Stock Z? Will any rational investor hold this portfolio (in this hypothetical two stock world)? Explain why or why not.

B. What is the expected return and the standard deviation of a portfolio consisting of 75% Stock Z and 25% Stock X? Will any rational investor hold this portfolio (in this hypothetical two stock world)? Explain why or why not.

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Financial Management, Finance

Category:- Financial Management
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