Assume analysts provide the following types of information. Further assume that short sales are allowed. Security...

Assume analysts provide the following types of information. Further assume that short sales are allowed.

Security	Mean Return	Standard Deviation
A	10%	4%
B	12%	10%
Risk-free asset	5%	0%

It is also known that the correlation coefficient between A and B is ρ=0.5.

a) What is the optimum portfolio of risky assets? What is the return and standard deviation of this optimal portfolio? [4.0]

b) Suppose you have $1000. How much should you invest in this portfolio and the risk-free asset if you wish to get 20% expected return? [1.0]

Expert Solution

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jeff jeffy answered 1 year ago

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