Question: Problem 2 - Increasing Correlations You create a portfolio that invests 4 0 % in stock A with E ( rA ) = 1 5

Problem 2- Increasing Correlations
You create a portfolio that invests 40% in stock A with E(rA)=15%,\sigma A =10% and 60% in
stock B with E(rB)=10%,\sigma B =4%.
1. Estimate the expected return of the portfolio.
2. Estimate the standard deviation of the portfolio if the two stocks are uncorrelated.
3. Estimate the standard deviation of the portfolio if the two stocks have correlation 0.5.
4. Estimate the standard deviation of the portfolio if the two stocks are perfectly positively
correlated.

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