The expected return on Big Time Toys is 9% and its standard deviation is 20%. The expected return on Chemical Industries is 8% and its standard deviation is 25%.
a. Suppose the correlation coefficient for the two stocks’ returns is .2. What are the expected return and standard deviation of a portfolio with 30% invested in Big Time Toys and the rest in Chemical Industries?
b. If the correlation coefficient is .7, recalculate the portfolio expected return and standard deviation, assuming the portfolio weights are unchanged.
c. Explain the difference between your answers to (a) and (b).