Appendix: PanAgora Fund SUMMARY OUTPUT Regression Statistics Multiple R 0.48 R Square 0.23 Adjusted R Square 0.22 Standard Error 0.03 Observations 119 ANOVA df SS MS F Significance F Regression 1 0.0425 0.0425 34.7468 3.71E-08 Residual 117 0.1432 0.0012 Total 118 0.1857 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept 0.01 0.00 3.20 0.00 0.00 0.02 S&P500(e) 0.44 0.07 5.89 0.00 0.29 0.592. [30pts] There are two risky asset, A and B, and one risk-free asset in the market. The risk- free rate is 2% and the risky asset A has the following return distribution: Bear Market Bull Market Probability 0.4 0.6 Risky Asset Return - 4% + 11% Throughout the problem 2, provide the answers rounded to the nearest ten-thousandth (i.e. (2-a) [2pts] What is the expected return of the risky asset A? (2-b) [3pts] What is the standard deviation of returns on the risky asset A?(2-c) [5pts] The risky asset B has the following statistical properties: E(r) = 0.20 and o = 0.40. Correlation between the returns on the two risky assets is 0. Draw the investment opportunity set that can be created by the risky assets A and B in the expected return - standard deviation space below.(2-d) [5pts] Write down the optimization problem to find the Optimal Risky Portfolio (ORP).(2-e) [5pts] The Optimal Risky Portfolio (ORP) constructed from the risky asset A and B has the following statistical properties: E(TORP) = 0.0753 and CORP = 0.0910 Draw the Capital Allocation Line made from the risk-free asset and the ORP in the graph in (2-c). Also, mark the risk-free asset and the ORP in the same graph. Calculate the slope of the Capital Allocation Line made from the risk-free asset and the ORP. (2-f) [5pts] An investor has the following utility function with A = 10: U = E(r) -=Aoz What would be the best portfolio choice for this investor when there are two risky asset, A and B, and the risk-free asset? Answer this by calculating mean return of the best portfolio.(2-g) [5pts] Mark the best portfolio chosen in (2-f) in the graph in (2-c). Show this with the Capital Allocation Line and the indifference curve of the investor