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Assume that risk free (money market fund) pays 2.0% and that the margin borrowing rate (should you need to borrow) is 7%. Further, the Market Expected Return is 12%.
Your task is to:
Part I
Select any two of these stocks, and calculate the most efficient portfolio (on a mean/variance basis) that you can create by using JUST THOSE TWO ASSETS .
Part II
You have a client who wishes to have a portfolio with a rate of return of (expected) 10%. What mix of two of your two stocks and of money market funds (paying 2%) or margin borrowing (cost = 7%) would you recommend?