(Two-stock efficient frontier, CML) Anders Smith proposes to invest in a portfolio of two stocks, X and Y. Information about the two stocks is given below

a. Fill in the highlighted cells, and compute the mean and standard deviation of each of the indicated portfolios.

b. Plot the portfolios into an expected return and standard deviation graph.

c. Suppose that Mr. Smith can also borrow and lend at an interest rate of 6%. Discuss how this alters his investment opportunities.
Calculate the portfolio M which maximizes the Sharpe ratio, and discuss briefly why Smith will always invest in this portfolio.

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A B C 1 Stock X Stock Y 2 Expected return 20% 14% 3 Sigma of return 35% 20% 0.4 4 Correlation 5 6 General X-Y portfolio 7 Percentage of X 88 0% 9 10% 10 20% 11 30% 12 40% 13 50% 14 60% 15 16 5678 70% 17 18 80% 90% 100% Sigma Mean