Asked by Chhor Sotheanea on Jun 07, 2024
Verified
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately ________.
A) 29%
B) 44%
C) 56%
D) 71%
Optimal Risky Portfolio
An optimal risky portfolio is a collection of financial assets that maximizes expected return for a given level of risk or minimizes risk for a given level of expected return.
Correlation Coefficient
A statistical measure that calculates the strength and direction of a linear relationship between two variables on a scatter plot.
- Acquire insight into the concepts of risk and expected return as they pertain to portfolio theory.
- Comprehend the significance of risk aversion in the selection of portfolios and allocation of assets.
- Become acquainted with critical concepts in portfolio management like the efficient frontier, capital market line, and optimal risky portfolio.
Verified Answer
JM
WB = 71%
Learning Objectives
- Acquire insight into the concepts of risk and expected return as they pertain to portfolio theory.
- Comprehend the significance of risk aversion in the selection of portfolios and allocation of assets.
- Become acquainted with critical concepts in portfolio management like the efficient frontier, capital market line, and optimal risky portfolio.