Assume E(R_M)=10%, (R_M)=15% and Rf=5%.

Z1 is moderately risk averse, seeking an expected return of 7.5%.

Z2 is strongly risk-seeking, seeking an expected return of 25%.

What are the recommended investment portfolios for the two investors, assuming CAPM? (As in the class presentations, the first coordinate in the (p,1-p) pairs refers to the proportion invested or borrowed at Rf) What is the standard deviation of the two recommended portfolios?

1. Z1s recommended portfolio is (0.5, 0.5); Z2s recommended portfolio is (-0.5,1.5); The standard deviations of the recommended portfolios are 7.5% and 22.5%, respectively.
2. Z1s recommended portfolio is (0.75, 0.25); Z2s recommended portfolio is (-3,4); The standard deviations of the recommended portfolios are 3.75% and 60%, respectively.
3. Z1s recommended portfolio is (0.25, 0.75); Z2s recommended portfolio is (0.6,0.4); The standard deviations of the recommended portfolios are 11.25% and 6%, respectively.
4. Z1s recommended portfolio is (0.5, 0.5); Z2s recommended portfolio is (-3,4); The standard deviations of the recommended portfolios are 7.5% and 60%, respectively.
5. Z1s recommended portfolio is (0.5, 0.5); Z2s recommended portfolio is (-2,3); The standard deviations of the recommended portfolios are 7.5% and 45%, respectively.