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Suppose that you have identified two stocks with risk and return properties as described in...

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Finance

Suppose that you have identified two stocks with risk and return properties as described in the table below:

Expected Return

E(Ri)

Variance

i 2

Standard Deviation

i

Correlation

1,2

Stock 1

10%

0.01

10%

+1

Stock 2

20%

0.09

30%

No negative weights are allowed, i.e., short-selling is not allowed.

Describe the set of all available portfolio risk-return combinations offered by these two stocks, i.e., the investment opportunity set. You can draw a chart instead of describing the investment opportunity set in words. Include your drawing in "show your work" at Question 36.

Hint: If you do not know the answer right away, try using different portfolio weights and calculate the mean return, standard deviation, and Sharpe ratio of the resulting portfolios. Comparing the mean return, standard deviation, and Sharpe ratio values will give you an idea of what the opportunity set will be like.

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