Mark Harrywitz proposes to invest in two shares, X and Y. He expects a return of 12% from X and 8% from Y. The standard deviation of returns is 8% for X and 5% for Y. The correlation coefficient between the returns is .2.
a. Compute the expected return and standard deviation of the following portfolios:
Portfolio | Percentage in X | Percentage in Y |
1 | 50 | 50 |
2 | 25 | 75 |
3 | 75 | 25 |
b. Sketch the set of portfolios composed of X and Y.
c. Suppose that Mr. Harrywitz can also borrow or lend at an interest rate of 5%. Show on your sketch how this alters his opportunities. Given that he can borrow or lend, what proportions of the common stock portfolio should be invested in X and Y?
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