Question 1

You are considering the combination of a riskless asset with a risky asset. The riskless asset has a return of 4% and the risky asset has an expected return of 9% and a standard deviation of 22%.

A) Calculate the expected return and standard deviation for an investor portfolio with 0%, 50%, 75%, 100%, and 125% in the risky asset. (10 marks)

B) Suppose for this and for part c) below that the borrowing rate was 6%. How does your answer to part a) change? (5 marks)

When borrowing rate change definitely the risk and return relationship also change for when we add some risk free asset in our portfolio then our average return also changed.

C) Now consider multiple risky assets. Assuming different lending and borrowing rates, how many efficient portfolios will exist? (5 marks)