Question: John and Mary are considering investing in a combination of ABC stock and XYZ stock. The return on ABC is determined by a coin flip: If the coin is heads, the return is 35% and if the coin is tails, the return on ABC is 10%. The return on XYZ stock is similarly determined, but by a separate coin flip.
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. John has decided to invest in a portfolio composed of 100% XYZ stock. Mary, on the other hand, is investing in a portfolio composed of 50% ABC and 50% XYZ. Whose portfolio is better? Why?