Problem: Jack is considering investments in a two stocks, X and Y. He anticipates a return of 12% from stock X and a return of 18% for stock Y. The standard deviation of return is 20% for stock X and 30% for stock Y. The correlation coefficient between returns is .30.
Question1. Evaluate the expected return and standard deviation of portfolio with 50% invested in the stock X and 50% invested in the stock Y
Question2. Evaluate the expected return and standard deviation of portfolio with 75% invested in the stock X and 25% invested in the stock Y
Question3. Plot the expected returns and standard deviations of portfolios in parts (a) and (b) along with expected returns and standard deviations for each of two stocks (that is, for portfolios invested entirely in stock X and Y.)
Question4. Suppose that Jack can borrow or lend at the interest rate of 6%. Sketch the impact on Jack's investment opportunities. Given the borrowing and lending opportunities accessible to Jack, determine approximately the proportions of stock portfolio which must be invested in stock X and in stock Y.