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Suppose Target's stock has an expected return of 25% and a volatility of 44%, Hershey's stock has an expected return of 15% and a volatility of 28%, and these two stocks are uncorrelated.

a. What is the expected return and volatility of an equally weighted portfolio of the two stocks?

The expected return is____? (Round to two decimal place.)

The volatility is____? (Round to two decimal place.)

Consider a new stock with an expected return of 20.0% and a volatility of 29%. Suppose this new stock is uncorrelated with Target's and Hershey's stock.

b. Is holding this stock alone attractive compared to holding the portfolio in (Select the best choice below.)

1. Yes, the new stock dominates Hershey, so you should hold this stock alone.
2. No, a combination of the Hershey and Target stocks has the same expected return but with a lower volatility.
3. Yes, the new stock dominates Target.
4. No, Target dominates the new stock.

C. Can you improve upon your portfolio in (a) by adding this new stock to your portfolio? Explain.(Select the best choice below.)

1. No, although the new stock dominates Hershey, the portfolio of Hershey and Target dominates the new stock so there is no reason to hold it.
2. Yes, but you should just hold the new stock by itself.
3. Yes, you are always better off holding the new stock than Hershey, so you should just replace Hershey with the new stock.
4. Yes, by holding a combination of all 3 stocks you can reduce risk while leaving expected return unchanged.

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