Reference no: EM132382523
StockA's expected return and standard deviationa reE[rA]=6% and σA=12%,while stockB's expected return and standard deviation are E[rB] = 10% and σB= 20%.
(a) Using Excel to compute the expected return and standard deviation of the return on a portfolio with weights wA=0, 0.1, 0.2, 0.3, 0.4, 0.5, 0.6, 0.7, 0.8, 0.9, and 1, for the following alternative values of correlation between A and B: ρAB=0.6 and ρAB= -0.4. Under the two different correlations, plot the expected return-standard deviation pairs on a graph (with the standard deviations on the horizontal axis, and the expected returns on the vertical axis).
(b) How would you construct a portfolio p with expected return of 8% using Stock A and Stock B? What is the standard deviation of the portfolio? (Assume ρAB = 0.4)
(c) How would you construct a portfolio q with standard deviation of 15% using Stock A and Stock B? What is the expected return of the portfolio? (Assume ρAB = 0.4)
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