Consider two assets (X and Y) with mX = 10%, mY = 10%, X2=.16, Y2=.25, and Cov(X,Y) = -.125. What is the expected return and variance of the portfolio having 70% invested in X and 30% invested in Y? Compare the risk and return of this portfolio with the risks and returns associated with investing everything in either X or Y.

What is rXY?

What is the expected return of the portfolio (m.7X+.3Y)?

What is the standard deviation of the portfolio (s.7X+.3Y)?

How does the standard deviation of the portfolio (s.7X+.3Y) compare to the standard deviations of assets X and Y?