Suppose the expected returns and standard deviations of A and B are E(R_A) = 0.15, E(R_B) = 0.25, σ_A = 0.40, and σ_B = 0.65, respectively.

(a) Calculate the expected return and standard deviation of a portfolio that is composed of 40 per cent A and 60 per cent B when the correlation between the returns on A and B is 0.5.

(b) Calculate the standard deviation of a portfolio that is composed of 40 per cent A and 60 per cent B when the correlation coefficient between the returns on A and B is –0.5.

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