Veronica decides to purchase stocks of two firms: A and B using her $200,000 cash. The market price for stock A is $80 and for B is $50. The expected return for A is 15% (25% for B) and the standard deviation for A is 20% (35% for B). The correlation between A and B is zero and a T-bill with maturity of 120 days is traded for 97.8 (face value 100). Assume that the markets rate will remain constant over time and that the bank will not allow Veronica to borrow more than $300,000.

a. Veronica decides to invest in one risky (only A or only B) and one risk-free security.

1. What will be the standard deviation of a portfolio with expected return 20%?

2. If Veronica is risk neutral, How many securities from type A or B she buy?

b. Veronica decides to invest in both A and B equally. What will be the expected return of a portfolio with standard deviation equals 0.10078

Answer rating: 100% (QA)

Veronicas Investment Decisions a Investing in One Risky and One RiskFree Security 1 Standard Deviation for 20 Expected Return We cant directly calcula... View the full answer