An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The standard deviation of returns on the optimal risky portfolio is ________.
A) 25.5%
B) 22.3%
C) 21.4%
D) 20.7%

Question

Quizplus · Accepted Answer

W_B = 11eaaae8_8b67_7904_a4b8_a9fec201c6bf_TB6474_00 W_B= 71% and W_A = 29% σ²r_p = (.292)(.392) + (.712)(.202) + 2(.29)(.71)(.39)(.20).4 σ²_r_p = .045804 σ_rp= 21.4%

An Investor Can Design a Risky Portfolio Based on Two