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The expected return of security A is 20% and that of security B is 10%. Also, the standard deviation of security A is 4% and that the standard deviation of security B is 2%. The correlation coefficient between A and B is 0.0.
a. What is the expected return on the portfolio composed of 50% security A and 50% security B?
b. What is the standard deviation of the portfolio’s return using the weights in part A (the measure of risk)?
c. Use the coefficient of variations to compare the expected risk and return of the portfolio in part a above with a portfolio that only consists of security B (100% of the portfolio’s value in B and 0% in A). Given their return, which is the more risky investment? Why?
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