Stock a Has an Expected Return R_A = 10% And \sigma

question 10

Essay

Stock A has an expected return r_A = 10% and $\sigma$ _A = 10%.Stock B has r_B = 14% and $\sigma$ _B = 15%.r_AB = 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?

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Definitions:

Non-Wholly Owned Subsidiaries

Subsidiaries in which the parent company owns more than 50% but less than 100% of the subsidiary's voting stock.

Contingent Consideration

Additional payment in a business acquisition that depends on specific future events, such as reaching certain performance milestones.

Interest Expense

The cost incurred by an entity for borrowed funds, recognized as a finance expense or interest cost.

Discount Rate

The discount rate applied in the evaluation of discounted cash flow (DCF) to calculate the current worth of future cash flows.