Question $4$

Assume that you are a portfolio manager, currently managing a risky portfolio $(P)$ and Risk

free asset $($F$).$ A risky portfolio that you manage offers an expected return $E(Rp)$ of $15\%$ with

the standard deviation of $(gP=15\%).$ The risk frep asset offers a rate of return of $(rf=4\%).$

Part A$)$

You have two clients. Client A is highly risk averse while client $B$ is a risk seeker.

Client A will be happy if he can achieve a combined portfolio return $(R_C)=9\%.$ What portion

of investment he should he allocating in risky portfolio and the rest in risk free asset? What

will be his combined portfolio risk $(gC)$ if he is to arhipve $9\%$ combined portfolio return

$(B6)?$

Given that client $B$ is more tolerance to risk, if client $B$ wishes to have a minimum combined

portfolio return of $12\%,$ What portion of investment he should be allocating in risky

portfolio and the rest in risk free asset? If the client B want to achieve more $16\%$ combined

portfolio return how much should he be investing in risky asset?

Part B$)$

An investment that offers an expected returns of $10\%.$ The invest has

the beta of $1\mathrm{.}0.$ the current market rate is $10\%$ with a risk free rate

of $5\%.$ Using the CAPM model calculate the required rate of return

for the investment. Daw security Market Line to show the position

of the investment. Determine whether the investment is under or

overpriced.