Final answer:
The expected return of the portfolio is 11.39% and the risk (standard deviation) of the portfolio is 9.51%.
Step-by-step explanation:
To find the expected return and risk of the portfolio, we need to calculate the weighted average of the expected returns and the standard deviations of the individual stocks.
Expected return of the portfolio = (Weight of stock A * Expected return of stock A) + (Weight of stock B * Expected return of stock B)
Weight of stock A = $40,000 / ($100,000)
= 0.40
Weight of stock B = ($100,000 - $40,000) / ($100,000)
= 0.60
Expected return of the portfolio = (0.40 * 10.9%) + (0.60 * 13.4%)
= 11.39%
Risk of the portfolio (standard deviation) = sqrt((Weight of stock A * Standard deviation of stock A)^2 + (Weight of stock B * Standard deviation of stock B)^2 + (2 * Weight of stock A * Weight of stock B * Standard deviation of stock A * Standard deviation of stock B * Correlation))
Risk of the portfolio = sqrt((0.40 * 8.5%)^2 + (0.60 * 11%)^2 + (2 * 0.40 * 0.60 * 8.5% * 11% * 0.27)) = 9.51%