Problem: Please disregard the short sale of stock. Instead, consider that you have purchased 100 shares of stock A.
Assume the following variance-covariance matrix:
Stock A B E(r)
A 0.09 12%
B 0.20 0.25 18%
There is unlimited borrowing and lending at the risk free rate of 8%.
a. What is the optimal weight of the two assets?
b. Write the equation of the capital market line.
c. Create a portfolio with 20% return. Describe that portfolio in terms of the holdings of stock A, B and the risk free asset.