The following diagram shows the investment opportunity set for portfolios containing stocks A and B.You need to know that:
•Point A on the graph represents a portfolio with 100% in stock A
•Point B represents a portfolio with 100% in stock B a.Is the correlation between A and B greater than,equal to,or less than 1.How do you know?
b.Which labeled point on the graph represents the minimum variance portfolio?
c.Which labeled point on the graph represents a portfolio with 88% invested in stock A and the rest in B?
d.If A and B are the only investments available to an investor,which of the labeled portfolios are efficient?
e.Suppose a risk-free asset exists,allowing an investor to invest or borrow at the risk-free rate of 3%.If the above graph is drawn perfectly to scale,which labeled point represents the optimal risky portfolio.
f.Under the assumptions in part (e),would it be wise for an investor to invest all of his or her money in stock A? Why or why not?

Question

The following diagram shows the investment opportunity set for portfolios containing stocks A and B.You need to know that:
•Point A on the graph represents a portfolio with 100% in stock A
•Point B represents a portfolio with 100% in stock B  a.Is the correlation between A and B greater than,equal to,or less than 1.How do you know?
b.Which labeled point on the graph represents the minimum variance portfolio?
c.Which labeled point on the graph represents a portfolio with 88% invested in stock A and the rest in B? 
d.If A and B are the only investments available to an investor,which of the labeled portfolios are efficient? 
e.Suppose a risk-free asset exists,allowing an investor to invest or borrow at the risk-free rate of 3%.If the above graph is drawn perfectly to scale,which labeled point represents the optimal risky portfolio.
f.Under the assumptions in part (e),would it be wise for an investor to invest all of his or her money in stock A? Why or why not?

Quizplus · Accepted Answer

The Answer of The following diagram shows the investment opportunity set for portfolios containing stocks A and B.You need to know that:
•Point A on the graph represents a portfolio with 100% in stock A
•Point B represents a portfolio with 100% in stock B  a.Is the correlation between A and B greater than,equal to,or less than 1.How do you know?
b.Which labeled point on the graph represents the minimum variance portfolio?
c.Which labeled point on the graph represents a portfolio with 88% invested in stock A and the rest in B? 
d.If A and B are the only investments available to an investor,which of the labeled portfolios are efficient? 
e.Suppose a risk-free asset exists,allowing an investor to invest or borrow at the risk-free rate of 3%.If the above graph is drawn perfectly to scale,which labeled point represents the optimal risky portfolio.
f.Under the assumptions in part (e),would it be wise for an investor to invest all of his or her money in stock A? Why or why not?

The Following Diagram Shows the Investment Opportunity Set for Portfolios