4) An investor can design a risky portfolio based on two stocks, A and B....
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4) An investor can design a risky portfolio based on two stocks, A and B. Use the following scenario:
State of the Economy Probability Stock A return Stock B return
Great 0.20 35% 4%
Good 0.40 18% 18%
Bad 0.25 0% 0%
Bust 0.15 -10% -2%
The t-bill rate of return is 4.5%.
a) The proportion of the optimal risky portfolio that should be invested in stock A & B is what?
b) The expected return on the optimal risky portfolio is what?
c) The Sharpe ratio of the optimal risky portfolio is what?
d) Investor wants to have an expected return of 8% for a complete portfolio. What proportion of his investment is in the complete portfolio (risk free, stock A and B)?
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