33.15
15. You have two stocks in your portfolio: Amazon.com and Merck (a
drug company). Amazon.com has an expected return of 60% and Merck
has an expected return of 40%. The standard deviation of Amazon.com's
return is 90% and the standard deviation of Merck's return is 30%.The
correlation between the two stocks is 0.2. You have 80% of your
money in Amazon.com and 20% of your money in Merck.
a. What are the expected return and standard deviation for your portfolio? (4)
b. You sell your Merck stock and replace it with Microsoft. If Microsoft's standard deviation of returns is also 30%, do you expect your portfolio variance to change? Explain your reasoning. (4)