1) Consider two risky stocks A and B. Stock A has an expected return of 20% and a standard deviation of 25%. Stock B has an expected return of 16% and a standard deviation of 13%. The correlation between the returns of A and B is +0.3. What is the expected return and standard deviation of a portfolio with 60% in A dn 40% in B?
2) Suppose the assumptions of the CAPM are satisfied. The risk free rate is 5%. The expected return on the market portfolio is 16%. You have discovered two well diversified portfolios with no firm-specific risk which have the following characteristics :
Portfolio A = Expected Return 8% / Bata 0.2
Portfolio B = Expected Return 17% / Bata 1.2
Which portfolio you will buy and which portfolio you will sell? Please briefly explain.