Question:
Consider investing money into two stocks. Suppose they have expected returns next year of 10% and 20%, respectively. Assume further that they have standard deviations of 15% and 25%, with a correlation of 50%.
1. What is the expected return on the equal-weighted portfolio?
2. How do you get a portfolio with 18% return and what is the risk of this portfolio?
3. How do you get a portfolio with 100% return and what is the risk of this portfolio?
4. Suppose the two stocks have realized returns of 30% and -10% next year. What is the realized return of the equal-weighted portfolio, and what will be the value of your wealth if you started with $100?