Consider the following two assets: A B

Correlation of stock's return with the market .4 .1

Standard deviation of the stock .25 .55

Standard deviation of the market .20

Expected rate of return of the market 9%

Risk free rate of interest 2%

a. What are the betas and expected returns of stocks A and B

b. Assume that the correlation between A and B is 0.2. Further assume that you can either hold only A or a portfolio of 70% A and 30%B. What are your expected returns and standard deviations? Which choice is better?

c. Rank the investors preferences between portfolios of 70% A and 30%B assuming these are his only holdings.