Question: The expected returns and standard deviation of returns for two securities are as follows: Security A Security B Expected Return 8% 15% Standard Deviation 14%

The expected returns and standard deviation of returns for two securities are as follows:

Security A Security B

Expected Return 8% 15%

Standard Deviation 14% 18%

The correlation between the returns is + .15.

a) Calculate the expected return and standard deviation for the following two-stock portfolios (assume all assets are invested in A or B):

All in A.

80% in A

60% in A

40% in A

20% in A

All in B

b) Graph the Investment Opportunity Set.

c) Which portfolio (of the choices above) is the minimum variance portfolio?

d) If the risk-free rate is 4%, what is the Tangency Portfolio?

e) Graph the Capital Allocation Line using the risk-free rate of 4% and the Tangency Portfolio from part (d).

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