# Portfolio risk, return and standard deviation

See the attached file.

Question 1:

a) Is it possible to increase return and decrease risk of a portfolio at the same time?

b) Why do investors buy common stocks instead of investing all their money in bonds and t bills.

Question 2:

Use the attached table table to answer -

A) If the investor allocates 30% of his money to Scott Corp. and the remaining 70% to Bill Corp and the correlation of returns of the 2 stocks is 0.5, what is the expected returns and standard deviation of the portfolio?

B)Explain what happens to the expected returns and standard deviation when you reallocate your portfolio and invest 50% in each stock.

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#### Solution Preview

Answers in the attached file.

Quest 1)

a) Is it possible to increase return and decrease risk of a portfolio at the same time?

Yes, through the process of diversification. If we hold a portfolio which has a single stock in it, we can reduce the risk and increase the return by adding another stock which has a higher expected return and has zero correlation with the earlier stock. For example suppose we have a stock A which has a expected return of 10% and a standard deviation ( a measure of risk) of 15%. To this ...

#### Solution Summary

The solution explains the risk and return of a portfolio and the change when portfolio composition is changed.