Stock a Has an Expected Return R_A = 10% and σ_A

question 33

Essay

Stock A has an expected return r_A = 10% and σ_A = 10%.Stock B has r_B = 14% and σ_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:

Support

Providing assistance, encouragement, or enabling resources to individuals or groups.

Coalition

An alliance of factions, parties, or nations for a specific purpose, often temporary.

Uniform Network

A network system where all components operate under the same protocol or standard.

Strong Ties

Relationships marked by close, personal connections and frequent interactions, often within a tight-knit community or network.