Question: 2. Suppose the expected returns and standard deviations of two stocks were: Stock A: E(R) = 9%, standard deviation = 36% Stock B: E(R) =

2. Suppose the expected returns and standard deviations of two stocks were: Stock A: E(R) = 9%, standard deviation = 36% Stock B: E(R) = 15%, standard deviation = 62% a) Calculate the expected return of a portfolio that is composed of 35% of stock A and 65% of stock B. (1 mark) b) Calculate the standard deviation of this portfolio when the correlation coefficient between the returns is 0.5 (2 marks) c) Calculate the standard deviation of this portfolio (same weights in each stock) when the correlation coefficient is now -0.5. (2 marks) d) How does changes in the correlation between the returns on A and B affect the standard deviation of the portfolio? (1 mark)

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