Portfolio Optimization Question

1. You have been hired by Fran to manage her portfolio. She wishes to include two risky assets and one risky-free asset in her portfolio. You have collected data on the assets and performed some preliminary calculations, which you have summarized in the following table: Probability Asset 1 Asset 2 Asset 3 0.2 0.03 0.01 0.01 0.4 0.03 0.08 0.1 0.4 0.03 0.09 0.05 E(Ri) 0.03 0.07 0.062 02 0 0.00092 0.001176 CORR(2,3) 0.65374945 (a) Determine the covariance of the risky assets. (b) Find the combination of risky assets that maximizes the slope of capital allocation line (c) You assume that Fran's utility function is represented as E(Rp)| 0.5A0%, and you determine Frans risk preferences are best described by an risk aversion coefficient of 60. Determine and evaluate Frans optimal asset allocation strategy, now including the risk-free asset in her portfolio. (d) Determine her expected return and standard deviation of Frans optimal portfolio strategy from (c). 1. You have been hired by Fran to manage her portfolio. She wishes to include two risky assets and one risky-free asset in her portfolio. You have collected data on the assets and performed some preliminary calculations, which you have summarized in the following table: Probability Asset 1 Asset 2 Asset 3 0.2 0.03 0.01 0.01 0.4 0.03 0.08 0.1 0.4 0.03 0.09 0.05 E(Ri) 0.03 0.07 0.062 02 0 0.00092 0.001176 CORR(2,3) 0.65374945 (a) Determine the covariance of the risky assets. (b) Find the combination of risky assets that maximizes the slope of capital allocation line (c) You assume that Fran's utility function is represented as E(Rp)| 0.5A0%, and you determine Frans risk preferences are best described by an risk aversion coefficient of 60. Determine and evaluate Frans optimal asset allocation strategy, now including the risk-free asset in her portfolio. (d) Determine her expected return and standard deviation of Frans optimal portfolio strategy from (c)