Problem
Assume that the two stocks Stock A and Stock B are the only risk-bearing assets available to investors. Suppose further that there is a bank that offers an interest rate of 2.37% on invested capital (risk-free) and a lending rate of 5.37%. Stock A has an expected return of 20% and a standard deviation of 25.97% and Stock B has an expected return of 9% and a standard deviation of 10.18%. Since the lending and deposit rates are different, the CML will no longer take the form of a straight line. Instead, CML consists of three different parts. The first part is a straight line extending from the deposit rate point and tangent to the portfolio front. The second part picks up where the first part ends and extends along the portfolio front to the point where a straight line extending from the lending rate is tangent to that portfolio front. The third part is a straight line and which takes up where the second part ends and has the same slope as a straight line extending from the lending rate and tangent to the portfolio front. The tangent portfolio when you invest part of your capital in the bank has an expected return of 12.36% with a standard deviation of 12.87%. The tangent portfolio when you mortgage your portfolio has an expected return of 15.91% with a standard deviation of 18.40%. Calculate the weight of Stock A in an optimal portfolio with an expected return of 14.17%.