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 0.4. The risk-free rate of return is 5%.
a. What is the proportion of the optimal risky portfolio that should be invested in stock B?
b. What is the expected return on the optimal risky portfolio?
c. What is the standard deviation of the returns on the optimal risky portfolio?
d. What is the proportion of the minimum variance portfolio that would be invested in stock B?
Solution describes the steps to calculate expected return and standard deviation of a optimal risky portfolio.