Question
1. Consider the capital allocation line (CAL) shown below. R is the risky portfolio. The risk-free rate is 2%. (a) An individual owns a portfolio
1. Consider the capital allocation line (CAL) shown below. R is the risky portfolio. The risk-free rate is 2%.
(a) An individual owns a portfolio with a variance of 144%. What are the
weights of this portfolio and the expected return?
(b) What portfolio weights must an individual construct in order to have an expected
return of 10%? What is the standard deviation of the portfolio?
(c) Suppose the investor has the portfolio in (b). What would happen to the CAL and
the portfolio decision if the investor becomes less risk averse? Explain.
(d) Suppose the investor cannot borrow at the risk-free rate, but rather faces a
borrowing rate of 4%. The investor puts 140% in the portfolio R. What is the
return and standard deviation of the investor's portfolio?
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