Stock A’s expected return and standard deviation are E[RA] = μA = 6% and σA = 12%, while stock B’s expected return and standard deviation are E[RB] = μB = 10% and σB = 20%.
(a) How would you construct a portfolio with expected return of 8% using stock A and stock B? What is the standard deviation of the portfolio? (Assume ρAB = 0.4)
(b) How would you construct a portfolio with standard deviation of 15% using stock A and stock B? What is the expected return of the portfolio? (Assume ρAB = 0.4)