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Hello, I am currently stuck on this problem. Any advice/help would mean a lot!

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Q3. Consider the following probability distribution for stocks A and B.
Scenario Probability Return on Stock A Return on Stock B
0.3
7%
-9%
WN
0.5
11%
14%
0.2
-16%
26%
Assume that the risk-free rate is 3%. The correlation between A and B is -0.5. Please
answer the following questions. (6 points.)
1. Suppose the tangency portfolio on the efficient frontier has expected return of 6.9%.
Please solve for the optimal weights of the tangency portfolio.
2. Compute the reward-to-volatility ratios of Stock A and Stock B. Explain why tan-
tive argument.
gency portfolio is superior to the individual stock A or B. Please provide quantita-
4

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3. Suppose two investors are making their capital allocation decisions. Investor 1
is more risk-averse than Investor 2. For each of the following choices, determine
whether the resulting allocation is NOT consistent with Markowitz portfolio se-
lection analysis (note: more than one of the allocations might not be consistent).
Please briefly explain your choice(s).
A. Both investors choose to invest 25% of their entire wealth in the risk-free asset.
B. Investor 2 decides to invest 100% of his wealth in the tangency portfolio, while
Investor 1 decides to invest 65% of his wealth in the tangency portfolio and
35% in the risk-free asset.
C. Investor 2 decides to go with 100% of his wealth in Stock B.
D. Investor 1 decides to invest 58% of his wealth in the tangency portfolio, while
Investor 2 decides to invest 78% of his wealth in the tangency portfolio.

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