Can you ever reduce your risk more by buying a risky


Suppose there are only two risky firms in an economy. The total value of the shares in firm A is 5 billion and the total value of the shares in firm B is 7 billion. For firm A the standard deviation of the returns to its shares is 20% and the expected return is 12%. For firm B the standard deviation is 30% and the expectedd return is 16%. There is also a risk free asset with a rate of return of 5% and total value of 5 billion. The assumptions of the CAPM hold. What is the expected return on a portfolio consisting 50% in the risk free asset and 50% in the market portfolio, and can you ever reduce your risk more by buying a risky security than by buying a risk-free asset?

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Financial Management: Can you ever reduce your risk more by buying a risky
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