Your uncle wants to create a portfolio based on two stocks, Google and Apple. Google has an expected return of 18% and a standard deviation of 20%.
Apple has an expected return of 14% and a standard deviation of 14%. The correlation coefficient between the returns of Google and Apple is 0.4. The risk free rate is 10%.
a) Help your uncle construct the optimatl risky portfolio. What is the weight of Google in the optimal risky portfolio?
b) What is the expected return of the optimal risky portfolio?
c) Your uncle wants to take on more risk - he wants his portfolio to have a 20% standard deviation. He suggests holding only Google in his portfolio. Without calculations, briefly explain how your uncle can do better.