Problem $3$

Consider the following two stocks

Stock A Stock B

Expected RETURN $0\mathrm{.}180\mathrm{.}13$

STANDARD DEVIATION $0\mathrm{.}450\mathrm{.}20$

BETA $0\mathrm{.}491\mathrm{.}27$

CORRELATION $0\mathrm{.}4$

A$.$ If an investor invests $40\%$ of her money in Stock A and the rest of the money in Stock B$,$

what is the expected return and standard deviation of her portfolio.

B$.$ On a diagram, plot standard deviation on the horizontal axis, and put expected return on the

vertical axis,

i$.$ roughly draw the opportunity set for all the possible combinations of the two stocks

given the correlation coefficient of $0\mathrm{.}3$ ;

ii$.$ draw the opportunity set again assuming a correlation coefficient of $-1.$

You don't have to be accurate with the diagram, no calculation is required.

C$.$ If the investor wants to create a portfolio with a beta of $0\mathrm{.}9,$ what would be the weights of the

two stocks in the portfolio?