Final answer:
Without the specific formula for calculating the exact weight of a two-asset portfolio, the exact proportion to invest in stock A cannot be provided. Investment choices reflect a tradeoff between expected return and risk, with higher risk assets like stocks requiring a higher average return to compensate for the increased risk.
Step-by-step explanation:
To determine the proportion of the optimal risky portfolio that should be invested in stock A, we need to use the Capital Asset Pricing Model (CAPM) and the concept of the efficient frontier which is part of Modern Portfolio Theory. However, without the formula for the weights of the stocks in a two-asset portfolio given a specific risk-free rate, expected returns, standard deviations, and correlation, we can't provide a numerical answer.
The expected rate of return combines with risk to inform decisions in building a portfolio. Understanding that different assets have different levels of expected returns and risks is key. For instance, stocks historically deliver higher returns than bonds or savings accounts due to higher risk, following the principle that higher risk should be compensated by higher potential returns.
Given the expected returns and standard deviations of stocks A and B, along with the correlation coefficient, one could compute the exact allocation using optimization models that aim to maximize return for a given level of risk.