Question

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 14% and a standard deviation of return of 20.0%. Stock B has an expected return of 10% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 6%. The proportion of the optimal risky portfolio that should be invested in stock A is ________.

Answer 1

Answer:

0

Explanation:

Given that :

Expected return on stock A (Ea) = 14% = 0.14

Expected return on stock B (Eb) = 10% = 0.1

Standard deviation of return (Sa) = 20% =0.2

Standard deviation of return (Sb)=5% = 0.05

Riskfree rate (rf) = 6% = 0.06

Correlation Coefficient between A and B (r) = 0.50

Wa = (.14-0.06)(.05)^2 - (.1-.06)(.20)(.50)(0.050) /

(.14-.06)(.05)^2 + (.10-.06)(.20)^2 -(.14-.06+0.1-0.06)(0.05)(0.20)(0.5)

= 0 / 0.012

= 0

Weight or proportion of optimal risky portfolio that should be invested in stock A.