The following table provides information on two risky stocks that you think, given some special information, are good investments.
Stock Expected Return Standard Deviation
A 0.15 0.23
B 0.20 0.18
The covariance between these two stocks is -.001. The expected return on the market is .15 with a standard deviation of .15. The risk-free rate is .03. You can borrow and lend at this risk-free rate. You have $1,000,000 to invest. Some of this you may put in risk free T-bills (with a return of 3%), with the remainder invested in a portfolio of the two stocks above. Consider a portfolio that has 50 percent of the amount you put at risk in Stock A and 50 percent in Stock B. Call the portfolio that consists of Stock A and Stock B your risky portfolio. For this risky portfolio, answer the following questions.
a. What is the expected return for this risky portfolio?
b. What is the standard deviation of the return on this risky portfolio?