Asset A has an expected return of 10% and standard deviation of 20%. Asset B has an expected return of 16% and a standard deviation of 40%. The correlation between A and B is 0.35. Portfolio C is composed of 30% asset A and 70% asset B.
Portfolio C: Expected return= 14.2% Standard deviation= 30.62%
Question:
Construct a plausible graph that shows risk (as measured by portfolio standard deviation) on the X axis and expected rate of return on the Y axis. Now add an illustrative feasible (or attainable) set of portfolios and show what portion of the feasible set is efficient. What makes a portfolio efficient? Don’t worry about specific values when constructing the graph-- merely illustrate how things look with "reasonable" data.