Suppose the expected returns and standard deviations of stocks A and B are E(R^A)=0.15, E(r^B)=0.25, s^a=0.1, and s^b=0.2, respectively.

a.Calculate the expested return and standard deviation portfolio that is composed of 40 percent A and 60 percent B when the correlation between returns on A and B is 0.5.

b. Calculate the standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when the correlation coefficient between the returns on A and B is -0.5.

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

Solution Preview

Suppose the expected returns and standard deviations of stocks A and B are E(R^A)=0.15, E(r^B)=0.25, s^a=0.1, and s^b=0.2,respectively.

a.Calculate the expested return and standard deviation portfolio that is composed of 40 percent A and 60 percent B when the correlation between returns on A and B is 0.5.
Expected return = Weight of stock A*expected return on ...

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