The following table outlines the information for 2 risky assets. Assume the correlation between the...
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Finance
The following table outlines the information for 2 risky assets. Assume the correlation between the returns on assets A and B is perfect negative (i.e. coefficient = -1).
A B Expected return E(R) % 12% 15% Risk ( %) 6% 10%
A
B
Expected Return E (R) %
12%
15%
Risk (%)
6%
10%
i. Determine the proportions of a portfolio to be made up of A and B such that this portfolio is risk-free. (1 mark)
ii. Compare the following two portfolios and identify which portfolio a rational investor will prefer (1.5 marks) a.37.5% in asset A and 62.5% in asset B b.87.5% in asset A and 12.5% in asset B
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