1. Suppose the U.S. Index has an expected return of 10% and a standard deviation of 15%. The Mexico Index has an expected return of 15% and a standard deviation of 30%. The two indices have a correlation coefficient of 0.40. Plug in these numbers into the worksheet 2 securities, 100 portfolios on my file PS7 student worksheets for parts b and c below.

a. Calculate the expected return and standard deviation of a portfolio that is weighted 88% in the U.S. and 12% in Mexico.

b. What portfolio (weightings) consisting of both the U.S. and Mexico indices the same standard deviation as being 100% invested in the U.S.? What advantage does this portfolio offer versus being 100% invested in the U.S. Index?

c. What portfolio (weightings) consisting of both the U.S. and Mexico indices has the smallest possible standard deviation?