A person is interested in constructing a portfolio. Two stocks are being considered. Let percent return for an investment in stock 1, and percent return for an investment in stock 2. The expected return and variance for stock 1 are and . The expected return and variance for stock 2 are and . The covariance between the returns is σxy = -3. a. What is the standard deviation for an investment in stock 1 and for an investment in stock 2? Using the standard deviation as a measure of risk, which of these stocks is the riskier investment?
b. What is the expected return and standard deviation, in dollars, for a person who invests
c. What is the expected percent return and standard deviation for a person who constructs a portfolio by investing 50% in each stock?
d. What is the expected percent return and standard deviation for a person who constructs a portfolio by investing 70% in stock 1 and 30% in stock 2?
e. Compute the correlation coefficient for x and y and comment on the relationship between the returns for the two stocks. .