Since Hilbilee’s correlation coefficient with the existing portfolio is less than 1, there are benefits to diversification, and adding it to the existing portfolio would reduce the variance below the current level of 0.024. (See calculations below). The other choices are correct.

ER_Portfolio = (w_Drysdahl × ER_Drysdahl) + (w_Clampett × ER_Clampett) = (0.40 × 10.5%) + (0.60 × 16.55%) = 14.13%.

The equation for the standard deviation = σ_1,2 = [(w₁²)(σ₁²) + (w₂²)(σ₂²) + 2w₁w₂σ₁σ₂ρ_1,2]^1/2,

Here stock 1 = Drysdahl and stock 2 = Clampett, and r_1,2 = cov_1,2 / (σ₁ × σ₂) = 0.001 / (0.085 × 0.25) = 0.047

σ_Portfolio = [(0.40² × 0.085²) + (0.60² × 0.25²) + (2 × 0.40 × 0.60 × 0.085 × 0.25 × 0.047)]^1/2 = 0.024^1/2, or 0.155 = 15.5%. (The variance is 0.024).