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7) There are only two securities (A and B, no risk free asset) in the...

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Accounting

7) There are only two securities (A and B, no risk free asset) in the market. Expected returns and standard deviations are as follows:

Security

Expected return

standard Deviation

Stock A

25%

20%

Stock B

15%

25%
  1. The correlation between stocks A and B is 0.8. Compute the expected return and standard deviation of a portfolio that has 0% of A, 10% of A, 20% of A, etc, until 100% of A. Plot the portfolio frontier formed by these portfolios
  2. Repeat the previous question, assuming that the correlation is

0.8.

  1. Explain intuitively why the portfolio frontier is different in the two cases.

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