Question: Elizabeth and Sandra are considering investing in a combination of ABC stock and XYZ stock. The return on both stocks is determined by a single coin flip: If the coin is heads, the return on both stocks is 35% and if the coin is tails, the return is 10%.
a. Compute the mean, variance and standard deviation of the returns on ABC and XYZ.
b. What is the correlation of the returns? (Nothing to compute here, just think!)
c. Elizabeth has decided to invest in a portfolio composed of 100% XYZ stock. Sandra, on the other hand, is investing in a portfolio composed of 50% ABC and 50% XYZ. Whose portfolio is better?