1 Asset allocation between risk-free asset and risky portfolio Assume that you manage a stock fund with an expected rate of return of 15% and a standard deviation of 20%. The T-bill rate is 5% and it is considered the risk-free rate. Your client decides to invest in only your stock index fund and the T-bill, i.e., her investment portfolio will be a combination of your stock fund and T-bill. However, your client has not yet decided on the investment proportions across the stock fund and T-bill. If your client evenly distributes her money between the stock fund and the T-bill, what is the mean return and standard deviation of her investment portfolio? What will be the Sharpe ratio of her portfolio? a. b. If your client decides to invest a quarter (0.25) of her money in your stock fund and three quarters (0.75) in T- bill, what is the mean return and standard deviation of her investment portfolio? What will be the Sharpe ratio of her portfolio? Describe the set of all available portfolio risk-return combinations offered by the T-bill rate and the stock fund, i.e., the Capital Allocation Line c. 20 F 15 10 F 0 10 15 20 25 30 Page 1 of 5