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Suppose you are building a two-asset portfolio with either stocks A and B or Stocks C and D. Stock A Stock B Stock C Stock
Suppose you are building a two-asset portfolio with either stocks A and B or Stocks C and D.
|
| Stock A | Stock B | Stock C | Stock D |
| Expected Return | 20% | 26% | 18% | 22% |
| Standard Deviation | 10% | 13% | 14% | 15% |
Explain, with the aid of a diagram, the conditions under which the optimal portfolio with stocks C and D dominates the optimal portfolio with stocks A and B. (10 marks)
- Explain, with the aid of an equation, the conditions under which variances of stock returns
are unimportant in the determination of the risk of a portfolio. (10 marks)
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