1. An investor can design a risky portfolio based on two stocks, A and B. Stock

Question

1. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 25% and a standard deviation of return of 10%. Stock B has an expected return of 11% and a standard deviation of return of 10%.The correlation coefficient between the returns of A and B is -0.5. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock A is _________. Note: Express your answers in strictly numerical terms. For example, if the answer is 5%, write 0.05"

2. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 25% and a standard deviation of return of 10%. Stock B has an expected return of 11% and a standard deviation of return of 10%.The correlation coefficient between the returns of A and B is -0.5. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is _________. Note: Express your answers in strictly numerical terms. For example, if the answer is 5%, write 0.05"

3. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 25% and a standard deviation of return of 10%. Stock B has an expected return of 11% and a standard deviation of return of 10%.The correlation coefficient between the returns of A and B is -0.5. The risk-free rate of return is 5%. The standard deviation of return on the optimal risky portfolio is _________. Note: Express your answers in strictly numerical terms. For example, if the answer is 5%, write 0.05"

Explanation / Answer

Expected Return on Stock A =25%

Standard Deviation on stock =10%

Expected Return on Stock B = 11%

Standard Devotion on stock B =10%

COV (ra , rb) = -0.5*0.1*0.1= -.005

Removing percentage as of now = covaroance = -50

= ((E(Ra) - rf) Sd -(E(rb)- rf)Cov(ra, rb))/((E(Ra) - rf) Sd
+(E(Rb) - rf) Sd -(E(Rs) - rf +E(Ra) -rf)Cov(ra rsb)

=((25-5)*10 -(11-5)*-50)/((25-5)*10 +(11-5)*10-(25+11-10)*-50)

= (200+ 300)/(200+60+1300)

=500/1560

=0.320513

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