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Q1. Portfolio Returns i. stock has mean of 8% and stdev of 20%; ii bond has mean of 4% and stdev of 10%; iii correlation

Q1. Portfolio Returns

i. stock has mean of 8% and stdev of 20%;

ii bond has mean of 4% and stdev of 10%;

iii correlation b/w stock and bond of -0.2;

iv. cash return is 1% for lending and borrowing.

c. how do you combine portfolio in Q1b with cash to match mean return in Q1a portfolio? What is the risk of this portfolio? (assume borrowing and lending cost of 1%)

d. If you want to mix portfolio in Q1b with cash, in order to match the risk of portfolio in Q1a, how much cash do you need and what is the resulting mean of the portfolio? (assuming cash return is 1%)

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