Stock X has an expected return of 12% and a standard deviation of 8%. Stock Y has an expected return of 8% and a standard deviation of 5%. The correlation coefficient between the returns for X and Y is 0.2. The risk free rate is 5%. For parts A, B, and C, find expected return, standard deviation, and Sharpe Ratio for:
a) a portfolio of 50% X and 50% Y.
b) a portfolio of 25% X and 75% Y.
c) a portfolio of 75% X and 25% Y.
d) Sketch the portfolios from parts a, b, and c on one risk-return graph.
e) Suppose that you can also borrow or lend at the risk-free interest rate (5%). Show on your sketch how this alters your opportunity set. Supposing these are the only 3 assets in the economy, label the Capital Market Line. Be sure to label which of your portfolios is on the Capital Market Line.