Question

Show all your work for partial credit! Connontuotto oy d bom The expected return of Stock A is 15% and the standard deviation is 20%. The expected return of Stock B is 10% and the standard deviation is 14%. The minimum variance portfolio (MVP) consisting of Stocks A and B has an expected return of 11.5% and a standard deviation of 12.25%. The weights of the MVP portfolio are 30% in Stock A and 70% in Stock B.

A) Draw a plot of the investment opportunity set (you should have 3 points, be as precise as possible, given the information above).

Answer 1

To plot the investment opportunity set, one must create a graph with standard deviation on the x-axis and expected return on the y-axis, and plot three points for Stocks A, B, and MVP.

Step-by-step explanation:

To answer the student's question regarding the investment opportunity set for Stocks A and B, we would need to plot three points representing the expected return and standard deviation for each stock, as well as the Minimum Variance Portfolio (MVP). However, as this is a text-based environment, I can describe how to create the investment opportunity plot:

• Draw a graph with the expected return on the y-axis and standard deviation on the x-axis.
• Plot Stock A at (20%, 15%) and Stock B at (14%, 10%).
• Plot the MVP at (12.25%, 11.5%).

You will have three points that should outline the investment opportunity set. An efficient frontier can be drawn as the curve starting from the MVP and arching upwards to the highest-returning stock.