Question 2 Stock A has an expected return of 8% and standard deviation of 12%. The risk-free rate is 2%. (a Suppose Bob has a risk aversion coefficient A=5. What percentage of his wealth should be invested in Stock A? (b) If Cincy has $100 dollars, and trades on margin by borrowing $50 additional dollars at the risk-free rate. She invests the $150 dollars in Stock A. What is her expected rate of return? Stock B has an expected return of 14% and standard deviation 18%. The correlation coefficient between A and B is 0.5. Suppose all investors aim to maximum the Sharpe Ratio of their portfolios. Would they prefer Stock A, Stock B, or a portfolio that invests 50% in Stock A and 50% in Stock B? (d) You run a single index model on Stock A and Stock B. The single factor is the market portfolio. You find the following: BA = 0.8,BB = 1.5, E(R) = 8% Suppose this period, RA = 9%, RB = 18%, RM = 10%. What are the idiosyncratic shocks for Stock A and Stock B, respectively? Question 2 Stock A has an expected return of 8% and standard deviation of 12%. The risk-free rate is 2%. (a Suppose Bob has a risk aversion coefficient A=5. What percentage of his wealth should be invested in Stock A? (b) If Cincy has $100 dollars, and trades on margin by borrowing $50 additional dollars at the risk-free rate. She invests the $150 dollars in Stock A. What is her expected rate of return? Stock B has an expected return of 14% and standard deviation 18%. The correlation coefficient between A and B is 0.5. Suppose all investors aim to maximum the Sharpe Ratio of their portfolios. Would they prefer Stock A, Stock B, or a portfolio that invests 50% in Stock A and 50% in Stock B? (d) You run a single index model on Stock A and Stock B. The single factor is the market portfolio. You find the following: BA = 0.8,BB = 1.5, E(R) = 8% Suppose this period, RA = 9%, RB = 18%, RM = 10%. What are the idiosyncratic shocks for Stock A and Stock B, respectively