Question: b) [10 marks] Consider two stocks, A and B, with expected returns and volatilities given by E[r]=10%, A=20%, E[B]=15%, B=30%. The riskless rate is

b) [10 marks] Consider two stocks, A and B, with expected returns and volatilities given by E[r]=10%, A=20%, E[B]=15%, B=30%. The riskless rate is 4%. The correlation of stock returns is 0.3. Consider now the tangency portfolio T for the efficient frontier constructed by investing in stocks A and B. The expected return of the tangency portfolio is E[r]=12.45%. What are the weights of stocks A and B and the riskless asset in the tangency portfolio T? What is the volatility of the tangency portfolio?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

To solve this problem we need to use the Capital Asset Pricing Model CAPM and the efficient frontier ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Read "Pervasive Myths About Immigrants" by Laura Collins on pp. 536-539.Select a myth and write an informative essay, using Collins's article as a model, in which you debunk the myth.

13. What is a lower bound for the price of 3-month call option on a non- dividend-paying stock when the stock price is $50, the strike price is $45, and the 3-month risk-free interest rate is 8%?...

Q1. You have identified a market opportunity for home media players that would cater for older members of the population. Many older people have difficulty in understanding the operating principles...

John Black is considering to purchasing a land from Real Estate Ltd for $1,000,000. The terms of the agreement are, 10% down payment, and the balance is to be repaid at 20% interest for duration of...

In dichloromethane, CH2Cl2, ( = 1.60 D) the dispersion force contribution to the intermolecular attractive forces is about five times larger than the dipole-dipole contribution. Compared to CH2Cl2,...

Analyze the companys financial statements by calculating the 12 ratios covered in this chapter and compare these ratios to industry averages found in RMAs Annual Statement Studies, Bizminer, or one...

define and compare the basic constructs used in the area of workfamily interaction, and understand the context in which they have been developed;

In each of the following independent situations, indicate whether the alternate valuation date can be elected. Explain why or why not. All deaths occur in 2015. Value of Gross Estate Estate Tax...

Last year, only 4 of 32 professional sports teams in a new league turned a nominal accounting profit. Betty purchased such a team this year. Betty operates the franchise in a business-like manner,...

On February 12, 2002, Nancy Trout and Delores Lake formed Kingfisher Corporation to sell fishing tackle. Pertinent information regarding Kingfisher is summarized as follows: Kingfisher's business...

Hello , can you take a look at the question attached and see if it is something you can help me with please. (only 2 questions) Ticonderoga Inverse Floating Rate Bond Questions Q2. Assume the LIBOR...

7. How Did Boeing Corporate Strategy Impact Design and Production of the 737 Max, and How Did Airbus Influence Boeing's Strategy and Product Quality (Starting in 2011)

In your organization, are the majority of physicians employed by the hospital or private practice? Do you think that being employed by a hospital or health service organization has a more positive...

Should there be continued support for the funding of primary care physician (Internists, Family Physicians, Psychiatrists, Geriatricians) education or shift resources to "associated healthcare...

What did Target Canada do wrong in their supply chain? What managerial decision errors took place? What was wrong with Target Canada's Information Systems in general? What was wrong with Target...

A product that is simple, complete, and "ready," that is to say works well enough is often the winner over a super product that does a lot more but is difficult to use and buggy. What examples of...

2 scoop (s) of strawberry ice cream costs 198 cents. 2. Create a new project named named lab6_2. You'te going to write a class of your choice! The class should contain i. A default constructor and a...

Give the structural formulas of the alkenes that, on ozonolysis, give: a. (CH3)2C=O and CH2=O b. Only (CH3CH2)2C=O c. CH3CH=O and CH3CH2CH=O d. O=CHCH2CH2CH2CH=O

A commercial bank offers you a $200,000 annual line of credit with the following terms: origination fee: $2,000 paid when the line is accepted fees: 1 percent on unused balance, paid at the end of...

A firm has the following investment alternatives. Each one lasts a year. The firms cost of capital is 7 percent. A and B are mutually exclusive, and B and C are mutually exclusive. a. What is the net...

You contribute $1,000 annually to a retirement account for 8 years and stop making payments at the age of 25. Your twin brother (or sister . . . whichever applies) opens an account at age 25 and...

7. How does adding a methyl or acetyl group to a histone protein alter gene activitypg99

14. How does the minimalist position differ from the abolitionist positionpg99

6. How does an epigenetic change differ from a mutationpg99