Yarra Inc’s stock has an expected return of 25% and a volatility of 35%, Dandenong Corp’s stock…

Yarra Inc’s stock has an expected return of 25% and a volatility of 35%, Dandenong Corp’s stock has an expected return of 15% and a volatility of 30%. The correlation between these two stocks is 15%. A risk-free asset is available yielding 5%.

a) What is the expected return and volatility of a portfolio of the two stocks where 60% of the portfolio capital is invested in Yarra and 40% in Dandenong?

b) Is the volatility of the portfolio in a) the same as the weighted average volatility of the individual stocks? Briefly explain why, or why not.

c) An investor has $1000 to invest and a required return of 30%. Show how the investor can achieve this return by investing in a portfolio that combines the risk-free asset and the risky portfolio in a).

d) Another investor can only tolerate a volatility of 5%. What return can this investor achieve by investing in a portfolio that combines the risk-free asset and the risky portfolio in a)?