Exercise 9 Two Risky Assets: (1) Debt (D) (2) Equity (E) Debt Equity 13% Expected return, r Standard deviation, o Covariance, Cov(rp,Fg) Correlation coefficient, PpE 12% 20% 0.72% 0.30 Expected return: E(rp) = WDTD + WgTE Risk: oi + 2wpWEPDEOpOE of = wo + w %3D What is the minimum standard deviation for risky portfolio? of - Cov(rp,TE) of + o 2Cov(rp,Te) 1. WMin (E) = 1 wD WMin(D) = %3! =0.04 -o0072 What is the optimal allocation for risky portfolio? 3. E(Rp)ol - E(R,))Cov(Rp. Re) WE=1-Wp E(Rp)aj + E(R)o - [E(R) + E(R)]Cov(Rp.Re) What is the expected return and standard deviation for the optimal risky portfolio? 4. 5. What is the optimal portfolio capital allocation line slope? The T-bill rate is 5%. E(rp)-r