Compute the expected return and standard deviation, Financial Management

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Question:

Consider the following information:

	Stock A	Stock B
Beta	0.8	1.4
Share price, $	20	40
Standard deviation	25%	50%
Correlation between A and B	0.25

Treasury bills currently yield 2%, and the market risk premium is 6%.

(a) Compute the expected return and standard deviation of a portfolio of 100 shares of Stock A and 100 shares of Stock B.

(b) Ajay has $10,000 to invest. He plans to invest $4,000 in Stock B. He will allocate the rest of his money to Treasury bills and Stock A. His goal is to construct a portfolio with a beta of 1.0. Compute the investment amounts (in dollars) in Treasury bills and Stock A required to achieve the goal.

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