Question 1: Consider two hypothetical stocks, X and Y. The expected return on stock X is equal to 17% and the expected return on stock Y is equal to 10%. The standard deviation of stock X and Y are 19% and 29%, respectively. The correlation coefficient between the two stocks is 0.427. The risk-free rate is 3.5%. Consider portfolio P, which contains 65% in stock X and 35% in stock Y.

What is the expected return of portfolio P? (2)

What is the standard deviation of portfolio P? (4)

How much should be allocated (i.e., what are the weights) to portfolio P and the risk-free asset to create a portfolio with an expected return of 12%? (5)

What would be the standard deviation of the combined portfolio (portfolio P and risk-free asset) found in part C? Show all steps. (4)

Calculate the Sharpe ratios of Stock X, Stock Y, and portfolio P. (6)

What is the expected return and volatility of a portfolio that is created by borrowing 15% at the risk-free rate, and investing 115% in the portfolio P? (2+2)