1. Your cousin Vigny is trying to take advantage of the recent changes in stock market. However, he

would like to invest in just two stocks, stock X and stock Y. He calls you asking for help, he knows you

are a UPRRP MBA candidate.

The following information has been provided by Miguelito-Investments, Vignys broker:

Expected returns of X= E(RX)=20%; Expected Returns of Y=E(RY)=15%. In addition, you find out that the expected product of the returns of RX times the return of RY, or E(RX.RY)=3%; the Standard Deviation of the returns of X=STD(RX)=29.5% and the standard deviation of the returns of Y=STD(RY)=18.20%.

Vigny has $ 2,000,000 that would like to invest, in both X and Y; 50% of that amount will go to X.

a. What return does Vigny expect to generate on this portfolio?

b. What is the risk of the portfolio?