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Consider the following information on stocks and bonds. The correlation between stocks and bonds is 0.30. Use the equations for portfolio expected return and portfolio
- Consider the following information on stocks and bonds. The correlation between stocks and bonds is 0.30. Use the equations for portfolio expected return and portfolio standard deviations to complete the table below.
% Stocks | % Bonds | %Expected Return | % standard deviation |
0% | 100% | 12% | 15% |
20% | 80% |
|
|
40% | 60% |
|
|
60% | 40% |
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|
80% | 20% |
|
|
100% | 0% | 20% | 30% |
Graph the investment opportunity set of the above stock/bond portfolios. If the risk free rate is 8%, draw the tangent line and determine the % stocks in the optimal portfolio.
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