Question 7 (20 marks) Investors have assess to a risk-free asset with a certain retum r; = 0.05. They are allowed to mix the risk-free asset with either Stock A or Stock B, but not both in forming his investment portfolio. The returns of both stocks are random, with means and variances: Ev=0.1,02 = 1 E[re] = 0.2, x 4 Part a. (10 marks) Draw the two budget lines formed by the two ways of mixing (mixing stock A with the risk-free asset, mixing stock B with the risk-free asset) in the same diagram, with: 4 the horizontal axis being the standard deviation of the portfolio the vertical axis being the expected return of the portfolio. Part b. (10 marks) Following Part a, suppose that the investors have different risk preferences. Would some of them choose to mix the risk-free asset with stock A while the others choose to mix the risk-free asset with stock B? Or they would all choose a mix with one of the two stocks and abandon the other stock? Show your result graphically. Question 7 (20 marks) Investors have assess to a risk-free asset with a certain retum r; = 0.05. They are allowed to mix the risk-free asset with either Stock A or Stock B, but not both in forming his investment portfolio. The returns of both stocks are random, with means and variances: Ev=0.1,02 = 1 E[re] = 0.2, x 4 Part a. (10 marks) Draw the two budget lines formed by the two ways of mixing (mixing stock A with the risk-free asset, mixing stock B with the risk-free asset) in the same diagram, with: 4 the horizontal axis being the standard deviation of the portfolio the vertical axis being the expected return of the portfolio. Part b. (10 marks) Following Part a, suppose that the investors have different risk preferences. Would some of them choose to mix the risk-free asset with stock A while the others choose to mix the risk-free asset with stock B? Or they would all choose a mix with one of the two stocks and abandon the other stock? Show your result graphically