Jane is considering investing in three different stocks or creating three distinct two-stock portfolios.

Jane
considers herself to be a rather conservative investor. She is able to obtain forecasted returns for the three
securities for the years 2016 through 2022. The data are given in the following table.
In any of the possible two-stock portfolios, the weight of each stock in the portfolio will be 50%. The three
possible portfolio combinations are AB, AC and BC.
Answer the following:
1. Calculate the expected return for each individual stock.
2. Calculate the standard deviation for each individual stock.
3. Calculate the expected returns for portfolios AB, AC and BC.
4. Calculate the standard deviations for portfolios AB, AC and BC.
5. Would you recommend that Jane invest in the single stock A or the portfolio consisting of stocks A and B?
Explain your answer from a risk-return viewpoint.
6. Would you recommend that Jane invest in the single stock B or the portfolio consisting of stocks B and C?
Explain your answer from a risk-return viewpoint.

Year
2016
2017
2018
2019
2020
2021
2022
Expected return
Standard deviation
Expected return portfolio
Standard devation portfolio

Stock A
10%
13%
15%
14%
16%
14%
12%

Stock B
10%
11%
8%
12%
10%
15%
15%

Stock C
12%
14%
10%
11%
9%
9%
10%

13.429%
1.988%

11.571%
2.637%

10.714%
1.799%

50% of A 50% of B
5
5
6.5
5.5
7.5
4
7
6
8
5
7
7.5
6
7.5

50% of C
6
7
5
5.5
4.5
4.5
5

AB
10
12
11.5
13
13
14.5
13.5

Portfolio
BC
11
12.5
9
11.5
9.5
12
12.5

AC
11
13.5
12.5
12.5
12.5
11.5
11

12.5 11.14286 12.07143

1.47196 1.40577 0.932227