Question

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 expected return on the optimal risky portfolio is approximately _________.

Answer 1

σ2rp = 0.045804

Step-by-step explanation:

The correct answer to the given question is σ2rp = 0.045804.

W = (0.14 - 0.05) (0.39 ^ 2) - (0.21 - 0.05) (0.20) (0.39) (0.4)

(0.14 - 0.05) (0.39 ^ 2) + (0.21 - 0.05) (0.20 ^ 2) - (0.14 - 0.05 + 0.21 - 0.05) (0.20) (0.39) (0.4)

σ2rp = (0.292) ( 0.392) + (0.712) (0.202) + 2 (0.29) (0.71) (0.39) (0.20) (0.4)

σ2rp = 0.045804