The stock of Koch Brickyard Inc. is expected to return 14 percent with a standard deviation of 5 percent. Uptown Potbelly Stove Works’ stock is expected to return 16 percent with a standard deviation of 9 percent.
a. If you invest 30 percent of your funds in Koch stock and 70 percent in Uptown stock, what is the expected return on your portfolio?
b. What is the expected risk of this portfolio if the returns for the two stocks have
i. A perfect positive correlation (+1.0)?
ii. A slightly negative correlation (–0.2)?
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