1. Consider the following two stocks and T-Bill:

1. Suppose you buy 50 shares of Stock A and 50 shares of Stock B. What is the expected return of this portfolio and what is its standard deviation? (Hint first calculate what fraction of your investment is in A and in B).

2. Suppose instead you decided to buy only 25 shares of Stock A, 25 shares of Stock B, and with the rest of your money buy Treasury bills. What is the expected return of this portfolio and what is its standard deviation? (Hint: use the result in (a) to calculate the standard deviation of a portfolio composed of half (A+B) and half in T-bill)

Security E(R) 0 Price Per Share PAB 30% $100 0.8 20% $75 T-Bill 2% 0% 0%