Question

An investor can design a risky portfolio based on two stocks, A and B. Stock A...

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 20% and a standard deviation of return of 18%. Stock B has an expected return of 11% and a standard deviation of return of 7%. The correlation coefficient between the returns of A and B is .29. The risk-free rate of return is 8%. The proportion of the optimal risky portfolio that should be invested in stock A is __________.

57%

69%

62%

47%

Homework Answers

Answer #1
To find the fraction of wealth to invest in Stock A that will result in the risky portfolio with maximum Sharpe ratio the following formula to determine the weight of Stock A in risky portfolio should be used

Where
Stock A E[R(d)]= 20.00%
Stock B E[R(e)]= 11.00%
Stock A Stdev[R(d)]= 18.00%
Stock B Stdev[R(e)]= 7.00%
Var[R(d)]= 0.03240
Var[R(e)]= 0.00490
T bill Rf= 8.00%
Correl Corr(Re,Rd)= 0.29
Covar Cov(Re,Rd)= 0.0037
Stock A Therefore W(*d)= 0.4728= 47%
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