An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The expected return on the optimal risky portfolio is ________.
A) 14%
B) 15.6%
C) 16.4%
D) 18%

Question

Quizplus · Accepted Answer

W_a = 11eaaae8_8b67_03cf_a4b8_97ff96f13fdd_TB6474_00 W_a= 0 E(rp) = 1(.14) = .1400 Since W_A = 0 and W_B = 1, the risky portfolio's expected return is the same as asset B's expected return.

An Investor Can Design a Risky Portfolio Based on Two