Two stocks A and B have expected returns, and a variancecovariance matrix of returns given in Table 1.

Table 1 Stock A Stock B

E(R) 0.14 0.08

Variance-covariance matrix:

Stock A Stock B

Stock A 0.04 0.012

Stock B 0.012 0.0225

a) What is the correlation coefficient between the returns on stock A and stock B?

b) What is the expected return and standard deviation of portfolio S which is invested 80% in stock A and 20% in stock B?

c) If you combine portfolio S with a risk free asset paying a return of 4%, what would be the expected return on a new portfolio V if you desire a standard deviation of 27.9%?

d) Plot in mean-standard deviation space the efficiency frontier between Stock A and Stock B, and identify portfolios S and V.