Question

Midas is considering two stocks. The expected return on LAN is 15% with a standard deviation of 32%. The expected return on GBT is 9% with a standard deviation of 23%. The correlation between the returns on LAN and GBT is 0.15. The betas of LAN and GBT are 1.2 and 0.8 respectively.
a. Assume that Midas would like to have a portfolio with a beta of 0.9. Recommend how he can invest in two stocks to achieve his objective. Determine the expected return and standard deviation on this portfolio.
b. Now suppose the T-bill rate is 4.5%. Recommend how Midas can construct a new portfolio with a beta of 0.6 by investing in both the portfolio in (a) and the T-bills. Determine the expected return and standard deviation on the new portfolio.

Answer 1