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Given that stocks X & Y have, the following expected returns and standard deviations as depicted in the table below;
| | Stock X | Stock Y |
| E(R) | 20% | 40% |
| Standard Deviation | 30% | 50% |
If the correlation between the two stocks is -0.7 and the weights of the assets in the portfolio are 2/6 and 4/6 for Stock X and Y respectively,
- Estimate the variance of the portfolio.
EV (10 marks)
- Discuss the significance and effect of the correlation coefficient of -0.7 on the diversification of the portfolio. CR (10 Marks)
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