Question: We have two assets: Stocks; Expected return 12% and SD 15% High yield bonds: Expected return 20% and Standard deviation 35% Correlation between the returns

We have two assets:

Stocks; Expected return 12% and SD 15%

High yield bonds: Expected return 20% and Standard deviation 35%

Correlation between the returns of the two assets is 0.3

We can borrow and lend at Risk free rate of 2%.

Question 1:What is our optimum allocation between the two Assets?

Question 2: If we want the Standard deviation of our portfolio to be 5%; how much do we hold in cash and both portfolios to achieve the best risk return trade off?

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