solution

Consider the following expected returns, volatilities, and correlations: Stock Duke Energy Microsoft Wal-Mart Expected Return 14% 44% 23% Standard Deviation 6% 24% 14% Correlation with Correlation with Correlation with Duke Energy Microsoft Wal-Mart 1.0 -1.0 0.0 -1.0 1.0 0.7 0.0 0.7 1.0 a) Consider a portfolio consisting of only Duke Energy and Microsoft. What is the percentage of your investment (portfolio weight) that you would place in Duke Energy stock to achieve a risk-free investment? b) What are the expected return and volatility of a portfolio that consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft? c) What are the expected return and volatility of a portfolio that has $3000 invested in Duke Energy, $4000 invested in Microsoft, and $3000 invested in Walmart stock?