Question 6 An investor is considering purchasing two securities as follows:

security	expect return	standard deviation
asset A	E(Ra) = 0.1	a = .06
asset B	E(Rb) = 0.08	b = .05

The correlation coefficient between their returns is ab = 0.05

(a) Manually calculate the expected return and standard deviation of a portfolio combining 60% of A and 40% of B.

(b) Now use a spreadsheet to calculate the expected return and standard deviation of portfolios of A and B in the following proportions:

A	B
100	0
0	100
50	50
40	60
60	40
70	30
30	70

(c) Now, recalculate the results, but this time, assume a correlation between A and B of one. ab = 1. Plot the results from parts (b) and (c).

(d) Which group of portfolios would a risk averse investor select, those in (b) or those in (c)? Why? Which combination/combinations would a risk averse investor select from the optimal group? Why?