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Benefits of diversification

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A portfolio consists of two stocks:

Stock Expected Return Standard Deviation Weight

Stock 1 10% 15% 0.30

Stock 2 13% 20% ???

The correlation between the two stocks' return is 0.30

(a) Calculate the expected return and standard deviation of the portfolio.

Expected Return:

Standard Deviation:

(b) (i) Briefly explain, in general, when there would be "benefits of diversification" (for any portfolio of two securities).

(ii) Describe whether the above portfolio would exhibit "benefits of diversification" (and why). [No calculations are required.]

(c) Show your calculations re: whether the above portfolio exhibits "benefits of diversification" and indicate whether it does/doesn't (and why).

Reference no: EM132953546

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