Stock 1: E(R) = 10%, SD = 10% ; Stock 2: E(R) = 20%, SD = 30% ; The correlation between Stock 1 & 2 = 0.5. The risk-free return of 5% is avaliable in T-bills.
A investor invested all of his $10,000 net worth in Stock 1.
(a) Is there any portfolio that can be formed with Stock 1, 2 and risk-free security that can make the investor better off? What is it? Assume that no short-selling of stocks is allowed. And also explain why the portfolio is better than investing Stock 1 alone.
(b) Based on the answer in (a), The investor is advised to invest in that portfolio but he asks if the investment in this portfolio can be guaranteed and will not regret with the portfolio one year from now. Can the advisor assure the investor that there will be no regrets and it is guaranteed? Why or why not? Explain in words.