Question: Consider two stocks, A and B . Expected returns on these stocks are: 1 0 % and 1 2 % Standard deviations of their returns

Consider two stocks, A and B. Expected returns on these stocks are: 10% and 12%
Standard deviations of their returns are:
20% and 34%
Returns on these two stocks are uncorrelated with each other. the risk-free interest rate is 4%.
Alice is a mean-variance optimizer. Her objective is to maximize the following function [mean portfolio return -2* portfolio variance]:
What fraction of her portfolio (in %) should Alice invest in the risk-free asset?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
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!

Q:

Consider two stocks, A and B . Expected returns on these stocks are: ? b a r ( r ) A = 1 0 . 7 9 % , b a r ( r ) B = 1 3 . 8 0 % . Standard deviations of their returns are: A = 2 1 . 8 3 % , B = 3 4...

Q:

Consider two stocks, A and B . Expected returns on these stocks are: ? b a r ( r ) A = 1 0 . 7 9 % , b a r ( r ) B = 1 3 . 8 0 % . Standard deviations of their returns are: A = 2 1 . 8 3 % , B = 3 4...

Q:

Consider two stocks, A and B . Expected returns on these stocks are: / b a r ( r ) A = 1 0 . 9 0 % , b a r ( r ) B = 1 3 . 6 8 % . Standard deviations of their returns are: A = 2 3 . 3 0 % , B = 3 4...

Q:

Consider two stocks, A and B . Expected returns on these stocks are: ? b a r ( r ) A = 1 0 . 3 6 % , b a r ( r ) B = 1 2 . 7 4 % . Standard deviations of their returns are: A = 2 1 . 8 3 % , B = 3 4...

Q:

Consider two stocks X and Y with the following expected returns (in percent) and standard deviations. How much of your $10,000 total investment should you invest in stock Y if you would like a...

Q:

Consider your portfolio of McDonalds and Microsoft stock. The McDonalds investment comprises 35% of the portfolio and the remaining 65% of the portfolio is invested in Microsoft. The two stocks...

Q:

Question 7 Consider your stocks with the following expected returns and standard deviations: Stock Expected Return Standard Deviation A 15% 12 B 13% 8 C 14% 7 D 16% 11 Are any of these stocks...

Q:

Question 7 Consider your stocks with the following expected returns and standard deviations: Stock Expected Return Standard Deviation A 12 15% 13% B 8 C 14% 7 D 16% 11 Are any of these stocks...

Q:

Consider two stocks X and Y with the following expected returns (in percent) and standard deviations. How much of your $10,000 total investment should you invest in stock Y if you would like a...

Q:

You can ignore the example. Requirement: I have to use excel to solve the question, so please tell me step by step how to do it. Thank you!! Consider two stocks A and B with returns ra and to such...

Q:

Annual Leave impacts the accounts of a business as follows: The cost of annual leave is an expense. The accrual of annual leave creates a liability for the business. When annual leave is taken or...

Q:

The UK government has introduced a series of tax cuts to try to stimulate economic growth. The current debt to GDP ratio for the UK is 95%. Explain, using relevant equations, what the impact of these...

Q:

What has been the trend with split - ticket voting in the last several decades? Split - ticket voting has remained the same Split - ticket voting has increased Split - ticket voting has declined...

Q:

10) For a bond that pays cash interest (i.e., not a zero coupon bond), YTM is (a) always equal to the coupon rate (b) always equal to the current yield (c) is always less than the coupon rate (d) can...

Q:

a lack of participation in decision making and initiative by employees;

Q:

too much short-term, situational thinking, and a lack of long-term planning;

Q:

Exposure to market forces has focused attention on the cost of human resources as a high proportion of operating costs.