Problem: Suppose that there are many stocks in securities markets and you locate two of them which have the following characteristics:
Stock Expected Return Standard Deviation
A 3% 6%
B 8% 10%
Correlation of the two returns = -1
1) If you wanted to invest in Stocks A and B in such a way as to minimize risk, what weights should you put on the two stocks?
2) What would the portfolio expected return and standard deviation be for the minimum risk portfolio?
3) If there were a market for risk-free assets (like T-bills), what rate of interest would you expect such assets to offer?