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Compute the expected return and standard deviation

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You consider investing in two stocks, A and B. The expected return on stock A is 11% and the standard deviation is 16%. The expected return on stock B is 17% and the standard deviation is 26%.

(a) The correlation between stocks A and B is 0.3. Compute the expected return and standard deviation of a portfolio that has 0% A, 10% A, 20% A, etc, until 100% A. Plot the portfolio frontier formed by these portfolios.

(b) Repeat the previous question, assuming that the correlation is 0.8.

(c) Explain intuitively Why the portfolio frontier is different in the two cases.

Reference no: EM133068801

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