Suppose that there are only three stocks in the market: Jazz, Inc., Classical, I

Question

Suppose that there are only three stocks in the market: Jazz, Inc., Classical, Inc., and
Rock, Inc. Their outstanding shares and prices are shown in the table below. The
risk-free rate is 2%. Assume that the market is efficient.
Security O.S. Price Cap Weight
Jazz Inc. 10,000 $6.00 $60,000 3/20
Classical Inc. 30,000 $4.00 $120,000 3/10
Rock, Inc. 40,000 $5.50 $220,000 11/20

Suppose that the expected returns of Jazz, Classical, and Rock are 10%, 6%, and 12%,
respectively. An investor who has $10,000 wants to achieve an expected return of 40%.
How much money should she invest in each stock and the risk-free security?

Explanation / Answer

none of the stocks' expected return is more than 40% (10%, 6%, 12% are all less than 40%)
risk free returns of 2% is also less than 40%

so it is impossible to build a portfolio with 40% expected returns using these 4 options.

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thanks in advance :)

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