Question 2

A: From a portfolio perspective, explain the normal distribution and its two moments of mean and standard deviation. Given that market returns are typically non-normal, provide an explanation of the higher orders of skewness and kurtosis. Use graphs to support answer

B (1): Assume a risk free rate of 6% prevails and there is a risky portfolio P available with an expected return of 14% and a standard deviation of 20%. Graph the capital allocation line showing the slope of the CAL

B (ii) Now assume that lending is conducted at the risk free rate of 6% but that borrowing is conducted at the higher rate of 7%. In this case graph the capital allocation line showing the slope information. Explain how this differs from the CAL in part 1 of this question.