Consider two securities X and Y displaying the following information:

Security X Y

Expected return 0.12 0.18

Standard deviation 0.22 0.25

Correlation Coefficient between

Securities X and Y 0.6

(a) What are the expected return and standard deviation of returns of a portfolio one quarter invested in security X and three-quarters in security Y?

(b) If Securities X and Y were to be combined into a portfolio what would be the weights of each security in the portfolio to minimize the portfolio standard

deviation?

(c) Calculate the expected return and standard deviation of the minimum variance portfolio.

(d) Suppose you can borrow or lend at a risk-free rate of 5 percent. Determine the expected return and variance of return for a portfolio that is composed of

40 percent of security X and 60 percent of risk-free assets.