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A portfolio manager is providing recommendations to her clients. Her research department has prepared the following information for her: Portfolio Stock X Stock Y Risk-free

A portfolio manager is providing recommendations to her clients. Her research department has prepared the following information for her:

Portfolio Stock X Stock Y Risk-free

Forecasted Return 8.0% 12.0% 5.0%

std dev 6% 20% 0%

(a) Which stock should an investor hold? Explain your answers.

(b) Draw the Capital Allocation Line of Stock X and Stock Y in one xy-coordinate system.

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