Questions to be answered using the below problem: 
a. What financial concept or principle is the problem asking you to solve? 
b. In the context of the problem scenario, what are some business
decisions that a manager would be able to make after solving the
problem?
c. Is there any additional information missing from the problem that
would enhance the decision-making process?
d. Without showing mathematical calculations, explain in writing how
you would solve the problem.

Problem:
Suppose the expected returns and standard deviations of stocks A and B
are E(Ra)=0.15, E(Rb)=0.25, StdDeva = 0.1 and StdDevb=0.2, respectively.
a.	Calculate the expected return and standard deviation of a portfolio
that is composed of 40% A and 60% B when the correlation between the
returns on A and B is 0.5. (don?t answer)
b.	Calculate the standard deviation of a portfolio that is composed of
40% A and 60% B when the correlation coefficient between the returns
on A and B is -0.5. (don?t answer)
c.	How does the correlation between the returns on A and B affect the
standard deviation of the portfolio? (don?t answer

Hi!!

This is an interesting question regarding concepts, not oriented to
show how to solve the problem.
Here is my answer:

a. What financial concept or principle is the problem asking you to solve? 

To solve this problem you must use the concepts of weighted average
summation, Expected Return, and the relationship between Correlation,
Variance of the
return, and Standard Deviation of the return.


b. In the context of the problem scenario, what are some business
decisions that a manager would be able to make after solving the
problem?

After solving the problem the manager could try to make a portfolio
with correlation between stocks that make the expected return more
predictible, that is by lowering the portfolio's StdDev.
If the two stocks are the only availables (that is, if the correlation
is given), then he must try to find the correct weights of the
different stocks to build a less risky portfolio, that is finding the
weights that minimize the portfolio's StdDev.


c. Is there any additional information missing from the problem that
would enhance the decision-making process?

Historical data regarding the stocks behaviour will be very helpful to
estimate correlations between different stocks, this would help to
build a better portfolio.


d. Without showing mathematical calculations, explain in writing how
you would solve the problem.

- First, you need to use the weighted average summation to get the
expected return on the portfolio.
- Second, you need to use the Variance formula to get the variance of
the portfolio.
- Third, to get the portfolio's StdDev (StdDev_P) you must use 
StdDev_P = sqrt(Variance)

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For further references see the following documents:
"Portfolios of Stocks" at Department of Economics - University of California:
http://www.econ.ucsb.edu/~sparendo/134a/lecture11.pdf

"Modern portfolio theory - Wikipedia, the free encyclopedia":
http://en.wikipedia.org/wiki/Modern_portfolio_theory

"Risk and Return" at University of Pittsburgh - Katz Graduate School of Business:
http://www.pitt.edu/~schlinge/fall99/l9.doc

"Portfolios of Two Assets" from the Macro-Investment Analysis text by
the Nobel Prize in Economic Sciences William F. Sharpe at Graduate
School of Business, Stanford University:
http://www.stanford.edu/~wfsharpe/mia/rr/mia_rr5.htm


-------------------------------------------------------

Search strategy:
To answer the question I used my own knowledge on the topic.
To find the reference sources I used the following keywords at Google.com:
portfolio "weighted average" "expected return"
portfolio "variance" "correlation"


I hope that this helps you. Feel free to request for a clarification
if you find something unclear and/or incomplete.

Best regards.
livioflores-ga

Thank you. Very timely. Excellent answer.  I have two more questions
posted.  Will tip more if you can help me.  Thanks.