Consider a simple universe of two equities with the following characteristics

i. Security 1: Expected return of = 3.00% and standard deviation of = 8.00%

ii. Security 2: Expected return of = 5.00% and standard deviation of = 10.00%

iii. Correlation of Security 1 and Security 2 returns of = .6

If you were to construct a portfolio containing only these two securities (showing you work),

1. What would be the portfolio expected return and portfolio standard deviation be in the cases where the allocation to Security 1 is (8 marks),

i. x1 = .2 and,

ii. x1 = 1.2 , respectively

2. Determine what the portfolio allocation would be to each security in the cases(4 marks),

i. where portfolio expected return was 6.00% and,

ii. where portfolio standard deviation was 9.00%

3. What would be the minimum standard deviation possible for the portfolio based on the allocation across the two securities in the cases (6 marks)

i. where short selling IS allowed,

ii. where short selling IS NOT allowed iii. determine whether the portfolios in 1.i and 1.ii above are efficient or inefficient

4. What would be the maximum expected return possible for the portfolio based on the allocation across the two securities in the cases (4 marks)

i. where short selling IS allowed,

ii. where short selling IS NOT allowed