2. Stock 6G has an expected return of 9% and Stock 7G has an expected return of 11%. Amazingly enough, the standard deviation of Stock 6G is also 9% and the standard deviation of Stock 7G is also 11%. Assume that these are the only two stocks available in a hypothetical world and that the correlation between the returns of the two stocks is +0.6:

1. What is the expected return and standard deviation of a portfolio containing:

• 25% 6G and 75% 7G
• 50% 6G and 50% 7G
• 75% 6G and 25% 7G

2. Identify the set of portfolios from which rational investors will choose. What is the minimum expected return (and the associated standard deviation) offered by these portfolios? What is maximum expected return (and the associated standard deviation) offered by these portfolios? You must show supporting work or explain how you derived your answers.

Answer rating: 100% (QA)

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