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

Question

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 16% and a standard deviation of return of 21%. Stock B has an expected return of 10% and a standard deviation of return of 16%. The correlation coefficient between the returns of A and B is .5. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________.

A. 16%

B. 84%

C. 85%

D. 15%

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 16% and a standard deviation of return of 21%. Stock B has an expected return of 10% and a standard deviation of return of 16%. The correlation coefficient between the returns of A and B is .5. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________.

Explanation / Answer

Hence option D is correct

Asset 1 0.16 0.21 0.50 Asset 2 0.10 0.16 Riskfree 0.05 Covariance matrix 0.0441 0.0168 0.0168 0.0256 Minimum variance portfolio Weight 1 0.244 Weight 2 0.756 Exp ret 0.115 Std dev 0.153 Tangency portfolio Weight 1 0.847 Weight 2 0.153

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