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What expected return would be optimal

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You can choose to invest in the following three securities: Expected Return Standard Deviation

Stock A 20% 30%

Stock B 15% 30%

UST (Risk Free) 5% 0%

NOTE: A and B have a correlation of 0.5.

a) Given the 0.5 correlation, which of the following two stock portfolios gives the better Sharpe Ratio: (65% of A and 35% of B) vs. (80% of A and 20% of B)?

b) If you are only willing to accept risk of your total portfolio with standard deviation=20%, What investment portfolio combining stock A, stock B and the Risk-free Bond would give you the best return? What Expected Return would be optimal?

Reference no: EM132572302

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