Course: Business Finance

Suppose the expected returns and standard deviations of stocks A and B are E(RA)=0.09, E(RB)=0.15, A=0.36, and B = 0.62, respectively.

a) Calculate the expected return and standard deviation of a portfolio that is composed of 30 percent of A and 70 percent of B when the correlation between the returns on A and B is 0.4.

b) Calculate the standard deviation of a portfolio with the same portfolio weights as in part (a) when the correlation between the returns on A and B is 0.

c) How does the correlation between the returns on A and B affect the standard deviation of the portfolio?