You estimated the single index (market) model for stocks A and B with the following results:

Return on Stock A: R_A = 0.06 + 0.5R_M + e_A

Return on Stock B: R_B = 0.04 + 1.5R_M + e_B

Where R_M is return on the single index and e_A and e_B are error terms which are not correlated with anything and have zero means.

In addition, the following statistics are known for the risk-free rate, R_M, and the error terms:

	Mean	Standard Deviation
Risk-free rate	3%	0%
Single index return, RM	10%	15%
Error term for Stock A return, eA	0%	20%
Error term for Stock B return, eB	0%	10%

Based on the information above, calculate the smallest possible portfolio return standard deviation one can get by forming a portfolio of Stock A and B.

Hint: Recall the formula for the minimum variance weight on A is:

2 ,

=2 +2 2,

where is the return standard deviation of asset i (i=A, B), and _, is the covariance between assets A and B.