Problem: Ebenezer Scrooge has invested 60% of his money in share A and the remainder in share B. He assesses their prospects as follows:
A B
Expected return (%) 15 20
Standard deviation (%) 20 22
Correlation between returns .5
1) What are the expected return and standard deviation of returns on his portfolio?
2) How would your answer change if the correlation coefficient were 0 or -.5?
3) Is Mr. Scrooge's portfolio better or worse than one invested entirely in share A, or is it not possible to say?