Question 1 (25 marks) a. Suppose you are building a two-asset portfolio with either stocks...
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Question 1 (25 marks)
a. Suppose you are building a two-asset portfolio with either stocks A and B or Stocks C and D.
|
| Stock A | Stock B | Stock C | Stock D |
| Expected Return | 19% | 25% | 17% | 21% |
| Standard Deviation | 9% | 12% | 13% | 14% |
Explain, with the aid of a diagram, the conditions under which the optimal portfolio with stocks C and D dominates the optimal portfolio with stocks A and B.
(15 marks)
b. Explain, with the aid of an equation, the conditions under which variances of stock returns are unimportant in the determination of the risk of a portfolio.
(10 mar
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