BFF3121 Week 9 Homework Question

Ann has $10k Australian dollars to invest in a complete portfolio. You have provided her a risky portfolio with return of 10.5% and standard-deviation of 15%, and a risk-free asset with return equals to 0%. After comparison between the risky and risk-free asset, Ann generally prefers the risk-free asset, as she is risk-averse and the highest risk level she could accept is indifferent between risk-free and risky asset.

A) Calculate the minimum value of Ann's risk-aversion factor. Keep 3 decimals in your answer.

B) Using the minimum value of the risk-aversion factor you derived from 1) and the information from the question, calculate the optimal weighting for the risk-free asset and the risky portfolio. Keep 3 decimals in your answer.

C) Using the weighting you derived from 2) and the information from the question, calculate the return and risk of Ann's complete portfolio. Keep 3 decimals in your answer.

D) John has $10k Australian dollars to invest in a complete portfolio. You have provided him a risky portfolio with return of 12.5% and standard-deviation of 18%, and a risk-free asset with return equals to 6%. After comparison between the risky and risk-free asset, John generally prefers the risk-free asset, as he is risk-averse and the highest risk level he could accept is indifferent between risk-free and risky asset.

Repeat your calculations in A) and B), calculate the minimum value of John's risk-aversion factor, and the optimal weighting between risk-free and risky portfolio.

Have you identified any trend after the calculation? Why? Please show all calculations in sequence.