b) [10 marks] Consider two stocks, A and B, with expected returns and volatilities given by...

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b) [10 marks] Consider two stocks, A and B, with expected returns and volatilities given by E[r]=10%, A=20%, E[B]=15%, B=30%. The riskless rate is 4%. The correlation of stock returns is 0.3. Consider now the tangency portfolio T for the efficient frontier constructed by investing in stocks A and B. The expected return of the tangency portfolio is E[r]=12.45%. What are the weights of stocks A and B and the riskless asset in the tangency portfolio T? What is the volatility of the tangency portfolio? b) [10 marks] Consider two stocks, A and B, with expected returns and volatilities given by E[r]=10%, A=20%, E[B]=15%, B=30%. The riskless rate is 4%. The correlation of stock returns is 0.3. Consider now the tangency portfolio T for the efficient frontier constructed by investing in stocks A and B. The expected return of the tangency portfolio is E[r]=12.45%. What are the weights of stocks A and B and the riskless asset in the tangency portfolio T? What is the volatility of the tangency portfolio?

Answer rating: 100% (QA)

To solve this problem we need to use the Capital Asset Pricing Model CAPM and the efficient frontier ... View the full answer