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6. (total 3 points) Consider two stocks A and B, with monthly (simple) returns rA and B. Assume that the expected monthly returns of the
6. (total 3 points) Consider two stocks A and B, with monthly (simple) returns rA and B. Assume that the expected monthly returns of the two stocks are up = 0.01 and LB = 0.015, the standard deviations of the monthly returns are gA = 0.08 and ob =0.12, and the correlation of the two monthly returns is p=0.5. Consider a portfolio in which you invest a fraction WA of your wealth in stock A and a fraction wB = 1 - WA of your wealth in stock B. (a) (1/2 point) Write down a formula that expresses the expectation of the monthly return on your portfolio in terms of WA, LA, and LB. (Use u to denote the expected return on your portfolio.) Then express wa in terms of u. (b) (1/2 point) Write down a formula that expresses the standard deviation of the monthly return of your portfolio in terms of WA, CA, OB, and p. (Use o to denote the standard deviation of the return on your portfolio.)
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