Question: Midas is considering two stocks. The expected return on LAN is 15% with a standard deviation of 32%. The expected return on GBT is 9%

Midas is considering two stocks. The expected return on LAN is 15% with a standard deviation of 32%. The expected return on GBT is 9% with a standard deviation of 23%. The correlation between the returns on LAN and GBT is 0.15. The betas of LAN and GBT are 1.2 and 0.8 respectively.

a. Assume that Midas would like to have a portfolio with a beta of 0.9. Recommend how he can invest in two stocks to achieve his objective. Determine the expected return and standard deviation on this portfolio. (12 marks)

b. Now suppose the T-bill rate is 4.5%.

Recommend how Midas can construct a new portfolio with a beta of 0.6 by investing in both the portfolio in (a) and the T-bills. Determine the expected return and standard deviation on the new portfolio. (8 marks)

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