Consider investing into two stocks. Suppose stock A’s expected return next year is µA = 10% and stock B’s expected return is µB = 20%. Also assume that they have standard deviations of σA = 15% and σB = 25%, with a correlation of ρ = 10%:
a) What is the expected return on the equal-weighted portfolio?
b) What is the risk (standard deviation) of an equal-weighted portfolio?
c) How do you construct a portfolio with 18% return and what is the risk of this portfolio?