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26 June, 12:16

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 16% and a standard deviation of return of 25%. Stock B has an expected return of 11% and a standard deviation of return of 10%. The correlation coefficient between the returns of A and B is. 4. The risk-free rate of return is 9%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately

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  1. 26 June, 14:40
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    Answer: 26%

    Explanation:

    Given the following;

    Expected rate of return A=16% = 0.16

    Standard deviation A = 25% = 0.25

    Expected rate of return B=11%=0.11

    Standard deviation B = 13% = 0.13

    Risk free rate = 9% = 0.09

    Optimal risky portfolio that should be invested in stock B

    (0.11 - 0.09) (0.25^2) - (0.16 - 0.09) (0.1) (0.25) (0.4) / (0.11 - 0.09) (0.25^2) + (0.16 - 0.09) (0.1) (0.25) - (0.11 - 0.09+0.16 - 0.09) (0.1) (0.25) (0.4)

    = 0.00055 / 0.0021 = 0.2619

    = 26%
  2. 26 June, 16:05
    0
    26%

    Explanation:

    An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 16% and a standard deviation of return of 25%. Stock B has an expected return of 11% and a standard deviation of return of 10%. The correlation coefficient between the returns of A and B is. 4. The risk-free rate of return is 9%.

    The proportion of the optimal risky portfolio that should be invested in stock B is approximately

    = (0.11 - 0.09) (0.25^2) - (0.16 - 0.09) (0.1) (0.25) (0.4) / (0.11 - 0.09) (0.25^2) + (0.16 - 0.09) (0.1) (0.25) - (0.11 - 0.09+0.16 - 0.09) (0.1) (0.25) (0.4)

    = 0.00055 / 0.0021 = 26%
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