Suppose the expected returns and standard deviations of stocks A and B are E( R A ) = .11, E( R B ) = .14, σA = .52, and σB = .65, respectively.
a. Calculate the expected return and standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when the correlation between the returns on A and B is .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 –.5.
c. How does the correlation between the returns on A and B affect the standard deviation of the portfolio?