1. Look back at the calculation for Campbell Soup and Boeing in Section 8.1 . Recalculate the expected portfolio return and standard deviation for different values of x 1 and x 2 , assuming the correlation coefficient p12 = 0. Plot the range of possible combinations of expected return and standard deviation as in Figure 8.3 . Repeat the problem for p 12 =-.5.
2. 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
2
25
75
3
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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