An investor can design a risky portfolio based on two stocks, a and b. stock a h

Question

An investor can design a risky portfolio based on two stocks, a and b. stock a has an expected return of 21% and a standard deviation of return of 39%. stock b has an expected return of 14% and a standard deviation of return of 20%. the correlation coefficient between the returns of a and b is 0.4. the risk-free rate of return is 5%

The proportion of the optimal risky portfolio that should be invested in stock B is approximately_________.  
A. 29%
B. 44%
C. 56%
D. 71%

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4. The risk-free rate of return is 5%.

E(rA) = 21%  
E(rB) = 14%
?(A) = Std Dev(A) =39%  
?(B) = Std Dev(B) = 20%
?(A,B) = Correl(A,B) = .4
rf = Return(risk free) = 5%

The expected return on the optimal risky portfolio is _________.  
A. 14%
B. 16%
C. 18%
D. 19%

Explanation / Answer

(A) C. 56%

The proportion of the optimal risky portfolio that should be invested in stock B is approximatel === 56%

(B)

?(B) = Std Dev(B) = 20%(C)

(C) C. 18%

The expected return on the optimal risky portfolio is === 18%

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