The stock of Jones Trucking is expected to return 13 percent annually with a standard deviation of 8 percent. The stock of Bush Steel Mills is expected to return 17 percent annually with a standard deviation of 14 percent. The correlation between the returns from the two securities has been estimated to be þ0.3. The beta of the Jones stock is 0.9, and the beta of the Bush stock is 1.2. The risk-free rate of return is expected to be 8 percent, and the expected return on the market portfolio is 15 percent. The current dividend for Jones is $4. The current dividend for Bush is $6.
a. What is the expected return from a portfolio containing the two securities if 40 percent of your wealth is invested in Jones and 60 percent is invested in Bush?
b. What is the expected standard deviation of the portfolio of the two stocks?
c. Which stock is the better buy in the current market? Why?