Now consider the EF that represents all portfolios consisting of both the risk-free asset and the 5 selected stocks.

1. What is the mathematical linear equation for the EF if the annual risk-free rate is 2%? Thus, express monthly expected return in terms of risk (as measured by standard deviation).
2. Consider the optimal portfolio O (with highest achievable utility) on the EF.

1. The proportion of the funds allocated to the tangency portfolio M in the optimal portfolio O can be expressed as

wM= E(RM-RF)kAM2

(2)

What is the value of k in equation (2)? Detail the computation of this value in your Word report.

2. If the risk aversion coefficient A = 4, compute the proportion of the funds allocated to M.
3. Compute the proportion of the funds allocated to M for A = 8.
4. Calculate the monthly expected return of the optimal portfolio O and its risk (standard deviation) when A = 4 and A = 8, respectively. Discuss your findings in your Word report.