Question: 4(a) There are two tasks in portfolio choice problem: (i) determination of the optimal risky portfolio and (ii) capital allocation. These two tasks are independent,

4(a) There are two tasks in portfolio choice problem: (i) determination of the optimal risky portfolio and (ii) capital allocation. These two tasks are independent, or one is separate from the other. Explain why. (5 marks)

4(b)Suppose that the expected return and standard deviation of stock A are 10% and 5% respectively, while the expected return and standard deviation of stock B are 15% and 10% respectively. Returns of stock A and B are perfectly negatively correlated. Also suppose that it is possible to borrow at the risk-free rate. What must be the value of the risk-free rate? (5 marks)

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