Question

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is _________.

A. 0%

B. 5%

C. 7%

D. 20%

Answer 1

Weights A and B in of optimal portfolio are calculated as follows:

So the entire portfolio is invested in B and therefore the portfolio standard deviation is that of B which is 5%

So the correct option is B