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What are the weights on asset A and asset B

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Question - Mary has access to risky stocks A and B. But she has no access to risk-free T-bills. The two assets have the following characteristics:

Stock A: Expected return = 12.5% per annum, Standard deviation = 14% per annum.

Stock B: Expected return = 5% per annum, Standard deviation = 8% per annum.

The correlation coefficient between return on stock A and return on stock B is 0.10.

Mary's utility function and her coefficient of risk aversion is equal to 3.

a) Suppose Mary wants to invest is a portfolio consisting of A and B such that the portfolio has the smallest possible variance. What are the weights on asset A and asset B in such portfolio?

b) What is the expected return of the portfolio you found in part a?

c) What is the standard deviation of the portfolio you found in part a?

d) If Mary's coefficient of risk aversion is 6 instead of 3, would your answer to part a change? Answer either "Yes" or "No" and briefly explain your answer. Note that you don't need to re-calculate your answer in part a.

Reference no: EM132499081

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