Question 2 (Correlated assets 1pt)

There are two assets in the market A and B.A has an expected return of 8% and a standard devi- ation of 10%. B has an expected return of 10% and a variance of 0.01. The correlation between A and B is 0.25. You cannot short.

1. What is the minimum standard deviation of a portfolio consisting of A and B ? Describe that portfolio for K dollars to invest. What is the expected return of this portfolio? (0.5pt)

2. What is the minimum standard deviation for a portfolio with expected return of 10% ? (0.5pt)

Hint: If there is only one portfolio that can achieve the target return of 10%, then it has automatically the largest standard deviation.