Purpose of diversification was to reduce risk

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Reference no: EM133327250

The correlation coefficient between the returns of the two companies is 0.80.Mrs. Linda has all of her wealth invested in Happy Bird's shares. She wishes to diversify her portfolio by redistributing her wealth, such as 30% being invested in Happy Bird shares and the rest in Quick Solution's shares.

Question 1: What will be the expected return of the new portfolio?

Question 2: What will be the standard deviation of returns for the new portfolio?

Question 3: After constructing the portfolio and reporting the results to Mrs Linda, she is quite upset, saying, 'I thought the whole purpose of diversification was to reduce risk? Yet you have just told me that the variability of my portfolio has actually increased from what it was when I invested only in Happy Bird'

Provide a response to your client that demonstrates that the new portfolio does or does not reflect the benefits of diversification. You must show all necessary calculations.

Reference no: EM133327250

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