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Sagot :
Answer:
So, the proportion of the optimal risky portfolio that should be invested in Stock A is 0% because the weight of Stock A is 0.
Explanation:
Solution:
Data Given:
Stock A = Expected Return 18%
Standard Deviation = 18.0%
Stock B = Expected Return 14%
Standard Deviation = 3%
Correlation Coefficient for Stock A and B = 0.50
Risk Free rate of return = 12%
For Proportion of the optimal risky portfolio that should be invested in Stock A can be computed through the calculation of weight of Stock A in optimal portfolio as follows:
= [tex]\frac{(w_{a} - RFR )SDB^{2} - (w_{b} - RFR )SDA*SDB*CC }{(w_{a} - RFR )SDB^{2} + (w_{b} - RFR )SDA^{2} * (w_{a} -RFR + w_{b} -RFR )SDA*SDB*CC }[/tex]
Where,
[tex]w_{a}[/tex] = Expected Return of Stock A = 18%
[tex]w_{b}[/tex] = Expected Return of Stock B = 14%
SDA = Standard Deviation of Stock A = 18%
SDB = Standard Deviation of Stock B = 3%
CC = Correlation Coefficient = 0.50
Plugging in the values, we will get.
= [tex]\frac{(18 - 12 )3^{2} - (14 - 12 )18*3*0.50 }{(18 - 12 )3^{2} + (14 - 12 )18^{2} * (18 -12 + 14 -12 )18*3*0.50 }[/tex]
= [tex]\frac{0}{486}[/tex]
= 0
So, the proportion of the optimal risky portfolio that should be invested in Stock A is 0% because the weight of Stock A is 0.
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