An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 16% and a standard deviation of return of 25%. Stock B has an expected return of 11% and a standard deviation of return of 10%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 9%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately

26%

Explanation:

Given the following ;

Expected rate of return A=16%= 0.16

Standard deviation A = 25% = 0.25

Expected rate of return B=11%=0.11

Standard deviation B = 13% = 0.13

Risk free rate = 9% = 0.09

Optimal risky portfolio that should be invested in stock B

(0.11 - 0.09)(0.25^2) - (0.16 - 0.09)(0.1)(0.25)(0.4) / (0.11 - 0.09)(0.25^2) + (0.16 - 0.09)(0.1)(0.25) - (0.11 - 0.09+0.16 - 0.09)(0.1)(0.25)(0.4)

= 0.00055 / 0.0021 = 0.2619

= 26%

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explanation:

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