1. Suppose that there are two risky assets, A and B, with expected returns equal to 2.3 % and 4.5 %, respectively. Suppose that the standard deviations of the returns are √6 % and √11 % and that the returns on the assets have a correlation of 0.17.

492 16 Portfolio Selection

(a) What portfolio of A and B achieves a 3 % rate of expected return?

(b) What portfolios of A and B achieve a √5.5 % standard deviation of return? Among these, which has the largest expected return?