Question
Consider the following information about a risky portfolio that you manage and risk-free asset: E (r p ) = 15%, p =20%, r f =7%.
Consider the following information about a risky portfolio that you manage and risk-free asset: E (rp) = 15%, p=20%, rf=7%.
a) Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected return of on overall complete portfolio equal to 25%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset?
b) What will be the standard deviation of return of the portfolio?
c) If her coefficient of risk aversion A=5, what will be her optimal allocation to the risky portfolio? Calculate the expected return and standard deviation of the optimum portfolio.
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