Suppose the stock market consists of only two risky stocks, A and B, which have the...

 

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Suppose the stock market consists of only two risky stocks, A and B, which have the following characteristics: Stock A B Expected Return 12% 3% Standard Deviation 21.8% 5.0% Suppose that in addition to stocks A and B, there exists a risk-free borrowing/lending opportunity with a 2% interest rate. A rational investor with $1,000 of wealth has constructed her portfolio in the following way: she borrows $500 at the risk-free rate and invests $1,500 in the market portfolio. The expected return of her portfolio is 8%. a. What are the portfolio weights on the risk-free asset and the market portfolio in her portfolio? b. What is the expected return of the market portfolio? c. What are the portfolio weights of stocks A and B in the market portfolio? d. If stocks A and B are uncorrelated, then what is the equation of the capital market line? Be specific. Suppose the stock market consists of only two risky stocks, A and B, which have the following characteristics: Stock A B Expected Return 12% 3% Standard Deviation 21.8% 5.0% Suppose that in addition to stocks A and B, there exists a risk-free borrowing/lending opportunity with a 2% interest rate. A rational investor with $1,000 of wealth has constructed her portfolio in the following way: she borrows $500 at the risk-free rate and invests $1,500 in the market portfolio. The expected return of her portfolio is 8%. a. What are the portfolio weights on the risk-free asset and the market portfolio in her portfolio? b. What is the expected return of the market portfolio? c. What are the portfolio weights of stocks A and B in the market portfolio? d. If stocks A and B are uncorrelated, then what is the equation of the capital market line? Be specific.

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a Portfolio weight on the riskfree asset wrf Amount invested in the riskfree asset Total wealth Port... View the full answer