Question: Consider a player with mean-variance preferences given by u = r P - s P choosing a portfolio P between two stocks g1 and g2

Consider a player with mean-variance preferences given by u = rP - sP choosing a portfolio P between two stocks g1 and g2 that are perfectly negatively correlated (i.e. = -1) where the expected return of stock 1 is larger than that of stock 2 (that is r1 > r2) and the risk measured by the standard deviation of stock 1 is larger than that of stock 2 (that is s1 > s2). Carefully explain how the optimal portfolio choice of this player is affected by an increase in the risk of stock 1.

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