You are considering investing in two shares, X and Y. The following data are available for the two shares:

	share A	share B
Expected return	12%	9%
standard deviation	6%	3%
beta	1.2	0.85

Write out the formula for the portfolio standard deviation of a two-asset portfolio. Explain what each term in the equation means. If you invest 60 percent of your funds in Share X, the remainder in Share Y and if the correlation of returns between X and Y is +0.4, compute the expected return and the standard deviation of returns from the portfolio. (c) What happens to the expected return and standard deviation of returns of the portfolio in part (b) if the following conditions exist? i) The correlation of returns between Share X and Y is +1.0. ii) The correlation of returns between Share X and Y is 0. iii) The correlation of returns between Share X and Y is -0.5 What conclusions can you draw from part (c) about the importance of the correlation coefficient?