Suppose the expected returns and standard deviations of Stocks A and B are E (R A )

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Suppose the expected returns and standard deviations of Stocks A and B are E (RA) = .10, E(RB) = .12, σA = .39, and σB = .72.

a. Calculate the expected return and standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when the correlation between the returns on A and B is .5.

b. Calculate the standard deviation of a portfolio with the same portfolio weights as in part (a) when the correlation coefficient between the returns on A and B is −.5.

c. How does the correlation between the returns on A and B affect the standard deviation of the portfolio?

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Corporate Finance

ISBN: 9781265533199

13th International Edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe

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