Problem:
Standard Deviation for portfolio of two risky investments: Mary Guilott recently graduated from college and is evaluating an investment in two companies common stock. She has collected the following information about the common stock of firm A and firm B:
- Firm A's common stock: 0.17 (expected return), 0.13 (standard Deviation)
- Firm B's common stock: 0.11 (expected return), 0.08 (standard Deviation)
- Correlation Coefficient: .20 (expected Return)
Required:
Question 1: If mary decides to invest 10% of her money in Firm A's common stock and 90% in Firm B's common stock, what is the expected rate of return and the standard deviation of the portfolio return?
Question 2: If mary decides to invest 90 percent of her money in Firm A's common stock and 10 percent in Firm B's common stock, what is the expected rate of return and the standard deviation of the portfolio return?
Question 3: Recompute your response to both questions a and b, where the correlation between the two firms stock return is -0.20
Question 4: Summarize what your analysis tells you about your portfolio risk when combining risky assets in portfolio
Note: Please show how to work it out.