Unformatted text preview: xpression for expected return above, we get E ( Rp ) = 1.4192 ! .02 + (1 " 1.4192 ) ! .09 = "0.0093 = "0.93% for ! a =1.4192 and E ( Rp ) = 0.2524 ! .02 + (1 " 0.2524) ! .09 = 0.0723 = 7.23% for ! a =0.2524. Since the latter value of ! a gives a higher expected return, this is the optimal portfolio for the investor. 2. If the investor invests ! a proportion of his wealth in Stock A and ! b = 1 ! ! a in Stock B, the portfolio has expected return E ( Rp ) = ! a E ( Ra ) + (1 ! ! a ) E ( Rb ) and standard 2 2
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deviation ! p = " 2! a + (1 ! " a ) ! b + 2" a (1 ! " a ) ! ab" a" b . The invest...
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