# Portfolio Returns, Standard Deviation, and Correlation

Suppose the expected returns and standard deviations of stocks A and B are E(RA) = 0.17,

E(RB) = 0.27, StdDevA = 0.12, and StdDevB = 0.21, respectively.

a. Calculate the expected return and standard deviation of a portfolio that is composed of 35% A and 65% B when the correlation between the returns on A and B is 0.6.

b. Calculate the standard deviation of a portfolio that is composed of 35% A and 65% B when the correlation coefficient between the returns on A and B is -0.6.

c. How does the correlation between the returns on A and B affect the standard deviation of the portfolio?

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#### Solution Preview

Please see the attached word document for a better formatted solution.

a.)

Let:

E(rP) = expected return on the portfolio

E(RA) = expected return on Stock A

E(RB) = expected return on Stock B

WA = weight of Stock A in the portfolio

WB = weight of Stock B in the ...

#### Solution Summary

The solution is in a word document that calculates expected return and standard deviation of a portfolio that is composed of two stocks with different weights. The solution also provides a calculation of the correlation between the two stocks.