Stock a Has an Expected Return RA = 10% and σA

question 17

Essay

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 equilibriumσ If not, how would an equilibrium be produced?

---

Definitions:

Doting Parents

Parents who are extremely and uncritically fond of their children, often indulging them.

Severe Disappointment

describes a profound feeling of sadness or dissatisfaction that arises when expectations are not met by reality.

Sentence Variety

The use of different length, structure, and types of sentences within a text to make it more engaging and maintain the reader's interest.

Motown Historical Museum

A museum located in Detroit, Michigan, that preserves the legacy of the Motown Record Corporation, including artifacts, photographs, and music exhibits.