Q3. Portfolio Returns

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

ii bond has mean of 6% and stdev of 15%;

iii correlation b/w stock and bond of -0.3;

iv. Risk free rate for cash lending and borrowing is at 1%.

a. What is the mean and stdev of a portfolio of that is 60% in stock and 40% in bond (3 points)?

b. What is the mean and stdev of a fully invested yet unleveraged portfolio in stock and bond, that assign weights based on inverse of stdev risk (3 points)?

c. How do you combine portfolio in Q3b with cash to match mean return in Q3a portfolio? What is your cash position? What is the stdev risk of this portfolio? (3 points)

d. You want to mix portfolio in Q3b with cash, in order to match the stdev risk of portfolio in Q3a. What is your cash position? What is the resulting mean return of the portfolio? (3 points)

e. if you want to target 12% stdev risk per year, how would you combine Q3b risk parity portfolio with cash? What are the portfolio weights in cash, stock, and bond respectively? What are the mean returns for portfolio? (3 point)