The correlation coefficient between stocks A and B is: = .7. Both stocks have an expected
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The correlation coefficient between stocks A and B is: ρ = .7. Both stocks have an expected return of 15% and a standard deviation of 20%. In addition, you calculated that the minimum variance portfolio (MVP) of A and B consists of 50% of A and 50% of B.
- a. Compute standard deviation and the expected return of MVP.
- b. Suppose a risk-free asset has an expected rate of return of 5%. Plot combination line that contains portfolios composed of stocks A and B on the standard deviation-expected return plane. Plot optimal capital allocation line (CAL). Clearly label axes and all important points on the graph.
- c. Calculate the slope of the optimal CAL. What is the name of this slope?
Related Book For
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates
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