2. Mary Johnson decides to invest $10,000 on financial market. She is allowed to invest on...

 

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2. Mary Johnson decides to invest $10,000 on financial market. She is allowed to invest on only two stocks IBM and GE if the money is invested in stock market. Mary can also invest on government risk-free security with rate of interest 8%. She can also borrow money at 8%. Using historical data, Mary estimates the following statistics: Expected Return % Variance % IBM 30 100 GE 15 25 The correlation between the returns of IBM and GE is estimated to be 0.5. What is the optimal investment strategy for Mary who is risk averse? 2. Mary Johnson decides to invest $10,000 on financial market. She is allowed to invest on only two stocks IBM and GE if the money is invested in stock market. Mary can also invest on government risk-free security with rate of interest 8%. She can also borrow money at 8%. Using historical data, Mary estimates the following statistics: Expected Return % Variance % IBM 30 100 GE 15 25 The correlation between the returns of IBM and GE is estimated to be 0.5. What is the optimal investment strategy for Mary who is risk averse?

Answer rating: 100% (QA)

Solution To determine the optimal investment strategy for Mary we need to calculate the expected return and risk of various portfolios that she can create using IBM and GE stocks as well as the govern... View the full answer