Irene Adler is considering investing in the common stock of

Irene Adler is considering investing in the common stock of Holmes and Watson. The following data are available for the two securities. .

................... Expected Return ..... Standard Deviation

Holmes .............. 0.12 ......................... 0.08

Watson ............. 0.16 .......................... 0.20 .

If she invests 60% of her funds in Holmes and 40% in Watson, and if the correlation of returns between these two securities is 0.45, what is the portfolio’s expected return and standard deviation? .

A. 14.4% and 13.70%

B. 13.6% and 11.03%

C. 13.6% and 13.70%

D. 14.4% and 11.03%

E. None of the above

Solution