Consider the Following Data for Stocks a and B $\bar { R } _ { \mathrm { A } } = 10 \%$

question 23

Essay

Consider the following data for stocks A and B: $\bar { R } _ { \mathrm { A } } = 10 \%$ ; $\bar { R } _ { B } = 19 \%$ ; $\sigma _ { \mathrm { A } } = 3 \%$ ; $\sigma _ { B } = 5 \%$ ; $\beta _ { \mathrm { A } } = 0.6$ ; $\beta _ { B } = 1.4$ ; $\rho _ { A B } = 0.4$
a. Calculate the expected return, variance, and beta of a portfolio constructed by investing 1/3 of your funds in stock A and 2/3 in stock B.
b. If the riskless rate of return were 5%, what percentage of money invested in risky stocks should an investor place in each stock (assuming A and B are the only risky assets available)?
c. If the security market line describes equilibrium, and stocks A and B are in equilibrium, what is the return on the market portfolio and the riskless rate of interest?
d. If an investor can lend and borrow at the riskless rate determined in part c, but is restricted to holding only one of the two risky stocks in this problem, which stock should be held?

---

Definitions:

Cognitive Impairments

Refers to conditions that significantly restrict an individual's mental functioning, affecting memory, attention, and decision-making.

Lay Epistemology

The study of how ordinary people form beliefs, knowledge, and understanding about the world.

Information Quantity

The amount of data or details available in a message or communication, which can affect understanding, decision-making, and information processing efficiency.

Accurate Knowledge

Information or data that is precise, correct, and true to the facts without errors or distortions.