Your portfolio consists of two stocks. Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market Return 6% 22% Aggressive Stock -3% 40% Defensive Stock 8% 11% The probability of the pessimistic (optimistic) scenario is 90% (10%) and the risk-free rate is 3%. What is the equation of SML and should you increase or decrease the weights of these two stocks in your portfolio? Please keep 2 decimals in your answer.

Your portfolio consists of two stocks. Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market Return 6% 22% Aggressive Stock -3% 40% Defensive Stock 8% 11% The probability of the pessimistic (optimistic) scenario is 90% (10%) and the risk-free rate is 3%. What is the equation of SML and should you increase or decrease the weights of these two stocks in your portfolio? Please keep 2 decimals in your answer.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 1P

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