An Analysis of the Stock Market Produces the Following Information

Essay

An analysis of the stock market produces the following information about the returns of two stocks: $\begin{array}{ll}&\text { Stock } 1 \text { Stock } 2\\\begin{array}{ll}\text {Expected Returns }\\\text { Standard Deviations}\end{array}&\begin{array}{|cc|}\hline 15 \% & 18 \% \\20 & 32 \\\hline\end{array}\end{array}$
Assume that the returns are positively correlated, with $\rho$ ₁₂ = 0.80.
a. Find the mean and standard deviation of the return on a portfolio consisting of an equal investment in each of the two stocks.
b. Suppose that you wish to invest $1 million. Discuss whether you should invest your money in stock 1, stock 2, or a portfolio composed of an equal amount of investments on both stocks.