Question

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 11% and a standard deviation of return of 18.0%. Stock B has an expected return of 7% and a standard deviation of return of 3%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock A is _________.
a. 0%.
b. 50%.
c. 32%.
d. 55%.

Answer 1

Answer:

A. 0%

Explanation:

The expected rate of return of A = 11%

Expected rate of return of B = 7%

Risk free rate = rfr = 5%

Sdb = 3%

SDa = 18%

Correlation coefficient = 0.50

The formula used to solve for the required answer is in the attachment.

When computed, we have

0.000054-0.000054/0.000036+0.000216

= 0/0.000252

= 0

Therefore the first option is the correct answer

0% should be invested in stock A.