Question
Suppose there are only two stocks in the world: stock A and stock B. The expected returns of these two stocks are 10 percent and
Suppose there are only two stocks in the world: stock A and stock B. The expected returns of these two stocks are 10 percent and 20 percent, while the standard deviations of the stocks are 5 percent and 15 percent, respectively. The correlation coefficient of the two stocks is zero.
a. Calculate the expected return and standard deviation of a portfolio that is composed of 30 percent A and 70 percent B.
b. Calculate the expected return and standard deviation of a portfolio that is composed of 90 percent A and 10 percent B.
c. Suppose you are risk averse. Would you hold 100 percent stock A? How about 100 percent stock B?
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