Consider two stocks, A and B. The expected return is 15% on A and 10% on B. The standard deviation of returns is 15% for A and 5% for B. The correlation coefficient between the returns is 0.4. Consider 11 different portfolios, ranging in 10% increments from 0% to 100% invested in A with the remainder invested in B (so the total investment always adds to 100%).

a) Find the expected return and the standard deviation on each portfolio

a) Draw a figure of the portfolio frontier, the combinations of expected return (on the Y-axis) and standard deviation (on the X-axis), of all the portfolios.

b) Suppose the risk free rate is 5%, draw the capital market line (the best combinations of risk and return now available)