Stock A has an expected return rA = 10% and σA = 10%. Stock B has rB = 14% and σB = 15%. rAB = 0. The rate of return on riskless assets is 6%.
a. Construct a graph that shows the feasible and efficient sets, giving consideration to the existence of the riskless asset.
b. Explain what would happen to the CML if the two stocks had (a) a positive correlation coefficient or (b) a negative correlation coefficient.
c. Suppose these were the only three securities (A, B, and riskless) in the economy, and everyone's indifference curves were such that they were tangent to the CML to the right of the point where the CML was tangent to the efficient set of risky assets. Would this represent a stable equilibrium? If not, how would an equilibrium be produced?
Recently Asked Questions
- Which item is typically not a consideration when researching a company in order to buy stock? Select one: a. P/E ratio b. Television and radio marketing
- Suppose you take out a 20-year mortgage for a house that costs $472288. Assume the following: If you make the minimum down payment, what is the minimum gross
- How does globalization affect the international transmission of diseases and efforts to combat it?