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Expected Return Standard Deviation Stock A 15% 5% Stock B 21% 8% a. Suppose you are building a two-asset portfolio with stocks A and B.

	Expected Return	Standard Deviation
Stock A	15%	5%
Stock B	21%	8%

a. Suppose you are building a two-asset portfolio with stocks A and B.

Explain, with the aid of a diagram, the conditions under which the portfolio with A and B dominates a risk-free asset.

b. Explain, with the aid of an equation, the conditions under which covariances of stock

returns are the major determinants of the risk of a portfolio.

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