# Question

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?

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?

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