Question 2 (8 marks)

Consider two assets A and B. Asset A offers an expected rate of return of 12% with a standard deviation

of 25%. Asset B offers an expected rate of return of 8% with a standard deviation of 30%. Assume that

the risk-free interest rate (rf) is zero.

Given that Stock A has higher return and lower risk than Stock B, would investors hold Stock B? If so,

explain graphically under what conditions would investors hold Stock B.