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Question 1 (20 marks) a. Suppose you are building a two-asset portfolio with stocks A and B. Stock A 15% Stock Be 21% Expected Return

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Question 1 (20 marks) a. Suppose you are building a two-asset portfolio with stocks A and B. Stock A 15% Stock Be 21% Expected Return Standard Deviation 5% 8% Explain, with the aid of a diagram, the conditions under which the portfolio with A and B dominates a risk-free asset. (10 marks) b. Explain, with the aid of an equation, the conditions under which covariances of stock returns are the major determinants of the risk of a portfolio. (10 marks)

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