Suppose the expected returns and standard deviations of stocks A and B are E (RA) = 0.09,

Question:

Suppose the expected returns and standard deviations of stocks A and B are E (RA) = 0.09, E (RB) = 0.15, σA = 0.36, and σB = 0.62, respectively.

a. Calculate the expected return and standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the correlation between the returns on A and B is 0.5.

b. Calculate the standard deviation of a portfolio with the same portfolio weights as in part (a) 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?

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