Lets say you get to choose any 2 stocks.
Is it possible that a portfolio can be built from the two stocks (long or short either, any weighting) that has a lower volatility (standard deviation of movements), and simultaneously higher percent return than either of the two underlying securities alone.
I want to say yes, but I think the answer is no. In the event of a correlation of -1 between A and B:
A: a stock with high stddev, and small positive return
B: a stock with same stddev, and small negative return
Long A short B = much higher returns, much higher stddev
Short A Long B = 0 return, 0 stddev
I currently have an infinite loop randomly building portfolios to test this at home. Bonus: Is it possible with a portfolio with more than 2 stocks in the portfolio?