Consider the following probability distribution for stocks X and Y: State Probability Return on Stock X Return
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Question:
Consider the following probability distribution for stocks X and Y:
State | Probability | Return on Stock X | Return on Stock Y |
1 | 0.3 | 10% | -12% |
2 | 0.5 | 12% | 16% |
3 | 0.2 | -14% | 22% |
If there exist a risk-free asset (rf) that earns 4% annual return. Identify the following for the optimal risky portfolio (P).
1. Composition of P (Weights of stock X and Y)
2. Return and risk of the optimal risky portfolio (P).
3. Draw the efficient frontier in the presence of a risk-free asset and mark portfolio P on the graph in part c above
Related Book For
An Introduction to Management Science Quantitative Approach to Decision Making
ISBN: 978-1337406529
15th edition
Authors: David R. Anderson, Dennis J. Sweeney, Thomas A. Williams, Jeffrey D. Camm, James J. Cochran
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