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Question # 3 : Asset Allocation [ 2 1 Points ] Suppose that a portfolio consisting of risky stocks has an expected return of E

Question #3: Asset Allocation [21 Points]
Suppose that a portfolio consisting of risky stocks has an expected return of E(rp)=0.128 with a standard deviation (p)=0.094. Suppose that the risk-free asset (treasury bills) has an expected return of rf=0.042.
Suppose that y is the proportion of the overall portfolio that is invested in the risky asset.
(a) Calculate the expected return of the overall (complete) portfolio that has a mix of the risky asset and the risk-free asset, E(rc).[Hint: Your answer will be a function of y ][4 Points]
(b) Calculate the standard deviation (c) of the overall (complete) portfolio that has a mix of the risky asset and the risk-free asset. [Hint: Your answer will be a function of y][3 Points]
(c) Graph the capital allocation line (CAL) for the overall portfolio. Be sure to properly label the x and y axis. Clearly identify the y-intercept on the graph. [4 Points]
(d) Calculate the Sharpe ratio of the risky portfolio. Round your answer to 3 decimal places. [3 Points]
(e) Calculate the expected return and standard deviation of the overall (complete) portfolio if the investor has chosen a weight of y=0.85. Round your answer to 4 decimal places. [3 Points]
(f) Suppose that an investor has a risk-aversion parameter of A=9.9. Calculate the fraction of this investor's portfolio that will be held in risky portfolio (y). Round your answer to 4 decimal places. [4 Points]
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