Question

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%

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%