Consider two stocks A and B with returns r_a and r_b such that E(r_a)=9%, E(r_b)=15%, s_a=10%, and s_b=19%.

Construct portfolios of the two stocks by investing fraction y in stock A and (1-y) in stock B, i.e., P=yA+(1-y)B. For the following four cases, vary weight y and plot the resulting portfolios expected return E(r_P) vs. its standard deviation s_P.

a) corr(r_a, r_b)=1.0;

b) corr(r_a, r_b)=0.5;

c) corr(r_a, r_b)=0.0;

d) corr(r_a, r_b)=-1.0;

Put all these graphs on the same plot. Choose increment and range for weight y to make the plot look pretty (for example, from 1 to 3 with increment 0.05).

Hint: when plotting graphs in Microsoft Excel, choose type of chart as XY(Scatter) and draw four graphs (or series). For Y-axis, use the expected return E(r_P) (same for all four graphs); for X-axis, use the standard deviation s_P (corresponding to four different values of correlation coefficient).