Answer:
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%
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%
