(Efficient frontier and finding M) Suppose that there are only two stocks, Company A and Company B. The relevant statistics for the portfolio are given below.

a. Show that a portfolio invested 80% in Company A and 20% in Company B is not optimal by showing a better portfolio.

b. Calculate the market portfolio M when the risk-free rate of return is 5%. (Recall that the M portfolio is the portfolio which maximizes the Sharpe ratio).

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1 A 2 Expected return 3 Variance of return 4 Standard deviation of return 5 6 Covariance of returns 7 Correlation of returns 8 9 Portfolio proportions 10 Company A 11 Company B 12 13 Portfolio expected return B Company A 8.00% 0.0200 Company B 25.00% 0.0900 D 14.14% 30.00%