Question

A.

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 17% and a standard deviation of return of 18.0%. Stock B has an expected return of 13% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 8%. The proportion of the optimal risky portfolio that should be invested in stock A is _________.

B.

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 15%, while stock B has a standard deviation of return of 21%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .030, the correlation coefficient between the returns on A and B is _________.

Answer 1

A

To find the fraction of wealth to invest in Stock A that will result in the risky portfolio with minimum variance
the following formula to determine the weight of Stock A in risky portfolio should be used
w(*d)= ((Stdev[R(e)])^2-Stdev[R(e)]*Stdev[R(d)]*Corr(Re,Rd))/((Stdev[R(e)])^2+(Stdev[R(d)])^2-Stdev[R(e)]*Stdev[R(d)]*Corr(Re,Rd))
							Where
						Stock A	E[R(d)]=	17.00%
Stock B	E[R(e)]=	13.00%
Stock A	Stdev[R(d)]=	18.00%
Stock B	Stdev[R(e)]=	5.00%
	Var[R(d)]=	0.03240
	Var[R(e)]=	0.00250
T bill	Rf=	8.00%
Correl	Corr(Re,Rd)=	0.5
Covar	Cov(Re,Rd)=	0.0045
Stock A	Therefore W(*d)=	-0.0772
Stock B	W(*e)=(1-W(*d))=	1.0772

Please ask remaining parts seperately, questions are unrelated,