Dinesh is a talented programmer. He is originally from Karachi, Pakistan, but he's been living in Northern California for a while. Although his specialty is Java, he's been paying close attention to all the investment talk at the parties his co-workers drag him to. Tired of getting harassed by his co-worker Bertram, he's thinking of striking out on his own as a portfolio manager. After much research, he thinks he has found a very marketable mix of assets. He expects Pied Piper stock to return 20% next year with a volatility of 40%. He expects Hooli stock to return 8% next year with a volatility of 12%. Dinesh is close to finding the right mix, but he is unsure about the tendency of these stocks to move together. Suppose Dinesh puts 75% of his funds in Pied Piper and the rest in Hooli. a) What is the expected return on his portfolio?
b) What is the standard deviation of his portfolio if the assets are perfectly positively correlated?
c) What is the standard deviation of his portfolio if the assets are uncorrelated?
d) What is the standard deviation of his portfolio if the assets are perfectly negatively correlated?