You are a US-based investor who likes expected return and dislikes variance. There are 2 stocks available to you:

Stock A / Stock B

Expected return 5% / 10%

Standard deviation 7% / 12%

 

a) You want to construct a portfolio with expected return of 8%. What are your portfolio allocations (percentages) to stocks A and B?

b) You decide to construct the portfolio from part a). However, you are not sure about the correlation between returns on stocks A and B. If you, as an investor, could choose any correlation value, which one would you choose and why?

c) You are still not sure what is the correlation between returns on stocks A and B. However, you calculated that the portfolio which has 50% invested in stock A and 50% invested in stock B has the standard deviation of 8.89%. What is the standard deviation of portfolio you constructed in part a)?

Answer rating: 100% (QA)

a To construct a portfolio with an expected return of 8 we can use the formula for the weighted aver... View the full answer