Assume that you manage a risky portfolio which consists of Stock A and Stock B in the proportions listed below. Expected Return with an expected rate of return of these stocks are also listed in the table. The T-bill rate is 5%.
Stock A: Proportion in Risky Portfolio: 32% E(R): 10% Standard Deviation: 5%
Stock B: Proportion in Risky Portfolio: 68% E(R): 20% Standard Deviation: 8%
ρAB=0.1
A client prefers to invest in your portfolio a proportion (y) that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio's standard deviation will not exceed 20%.
a. What is the investment proportion, y?
b. What is the expected rate of return on the overall portfolio?