[Efficient Frontier] (30 pts)

Return and risk characteristics of stocks AAA and BBB are given in the following table:

Stock Expected rate of return Expected risk level

AAA 12% 4%

BBB 16% 6%

Calculate the expected returns and expected standard deviations of a two-stock portfolio having a

correlation coefficient of 0.70 under the following conditions. (20 pts)

Conditions Weight of

AAA

Expected portfolios return Expected portfolios risk level

i 100%

ii 75%

iii 50%

iv 25%

v 5%

Then, plot the results on a return-risk space (when the correlation coefficient is +0.70). Next, without

calculations, draw in what the curve would look like first if the correlation coefficient had been 0.00 and

then if it had been -0.70. (10 pts)