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There are two stocks: A and B, and Treasury Bill (TB). The parameters of these securities are following: Expected Return Standard Deviation Correlation with Stock

There are two stocks: A and B, and Treasury Bill (TB). The parameters of these securities are following:

Expected Return

Standard Deviation

Correlation with Stock A

Stock A

10%

20%

1

Stock B

15%

25%

0.2

TB

5%

0%

a. If you need an expected return of 12% and you only have the access to the three securities above, what is your optimal portfolio composition? What is the standard deviation of your portfolio?

b. If you need an expected return of 12% and you only have the access to the two stocks above (but no access to TB), what is your portfolio composition? What is the standard deviation of your portfolio?

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