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 37%. Stock B has an expected return of 16% and a standard deviation of return of 22%. The correlation coefficient between the returns of A and B is .5. The risk-free rate of return is 6%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________.

Answer 1

Formula for Optimal RISKy Portfolio weights:-

WB = 0.7039

So, the proportion of the optimal risky portfolio that should be invested in stock B is approximately is 0.7039 or 70.39%

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