Question
An investor would like to design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and
An investor would like to design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4. The risk-free rate of return is 5%. a. What are the proportion of the optimal risky portfolio that should be invested in stock A and in stock B, respectively? b. A client decides to invest 40% in the optimal risky portfolio and 60% in the risk free asset. What are the expected return and standard deviation of this clients complete portfolio? What is the Sharpe ratio of the clients complete portfolio? (c) Instead of investing 40% in the risky portfolio, the client now decides to invest in the risky portfolio a proportion (y) of her total investment budget so that her complete portfolio will have an standard deviation of 25%. What is the proportion of y?
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