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