Use the expected annual return and standard deviation of return data below provided by a security analyst on two stocks: Starbucks and Target. Use this information to answer the next 3 questions.

E(r) s

Starbucks (SBUX) 25% 50%

Target (TGT) 12% 25%

The correlation coefficient () of the returns between SBUX and TGT is assumed to be +0.2.

1. The standard deviation of return of a portfolio of SBUX and TGT is closest to _____.

A. 39.23% B. 43.75% C. 37.5% D. 38.02%

2. If you find the portfolio of SBUX and TGT that minimizes the variance (and standard deviation) of return it would have portfolio weights of approximately _____.

A. SBUX = 0.14, TGT = 0.86

B. SBUX = 0.50, TGT = 0.50

C. SBUX = 0.333, TGT = 0.666

D. SBUX = 0.666, TGT = 0.333

Suppose that you can combine only SBUX and TGT to create a risky portfolio. A risk-free asset cannot be used. Assume a utility function: U = E(r) - .5As² with A = 2.

3. The optimal portfolio weights to combine SBUX and TGT to maximize the investors utility are approximately _____.

A. SBUX = 0.666, TGT = 0.333

B. SBUX = 0.333, TGT = 0.666

C. SBUX = 0.14, TGT = 0.86

D. SBUX = 0.39, TGT = 0.61

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The answers I got were:

1. .97308

2. A

3. D

I am not sure my answers are correct. Please show formulas used for calculations, as I'm not confident I have been using the correct formulas. Thank you.