15.1

1. Let’s say you have 2 stocks: Intel and Microsoft. Assume that Intel’s average return over the last 5 years has been 20% per year and that Microsoft’s has been 25%. Also assume that the standard deviations of those returns were 30% and 40%, respectively. (2 pts.)

1. If the correlation coefficient (r ) for these two stocks is 0.8, what would be the standard deviation of a portfolio invested 40% in Intel and 60% in Microsoft?
    
    
2. If the correlation coefficient were 0.5 instead, would the portfolio standard deviation be greater than or less than in (a)? Why?

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