Question

# Stock A's expected return and standard deviation are E[rA] = 6% and σA= 12%, while stock B's

expected

return and standard deviation are E[rB] = 10% and σB= 20%.

(a) Using Excel to compute the expected return and standard deviation of the return on a portfolio with

weights wA=0, 0.1, 0.2, 0.3, 0.4, 0.5, 0.6, 0.7, 0.8, 0.9, and 1, for the following alternative values of

correlation between A and B: ρAB=0.6 and ρAB= -0.4. Under the two different correlations, plot the

expected return—standard deviation pairs on a graph (with the standard deviations on the horizontal

axis, and the expected returns on the vertical axis).

(b) How would you construct a portfolio p with expected return of 8% using Stock A and Stock B? What is the

standard deviation of the portfolio? (Assume ρAB = 0.4)

(c) How would you construct a portfolio q with standard deviation of 15% using Stock A and Stock B? What is

the expected return of the portfolio? (Assume ρAB = 0.4)

(d) If you want to have the minimum variance for your portfolio z, what will be your portfolio weights? In this

case, what are the expected return and variance of your portfolio? (Assume ρAB = 0.4)