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Question #4: The Optimal Portfolio [20 Points] You are attempting to construct an optimal portfolio consisting of T-bills and a risky portfolio. The expected return
Question #4: The Optimal Portfolio [20 Points] You are attempting to construct an optimal portfolio consisting of T-bills and a risky portfolio. The expected return on the risky portfolio is 23% and the standard deviation is 21%. The T-bill rate is 3.4%. (a) If you put 42% of your funds in T-bills and 58% in the risky portfolio, what is the expected return and standard deviation of your overall portfolio? [3 Points] (b) Construct a Capital Allocation Line for a portfolio consisting of the T-bills and the risky portfolio. Draw the line and indicate the y-intercept and the point where the portfolio is entirely made up of risky assets. What is the slope of this line? [3 Points] (c) Suppose that Lars has a degree of risk aversion of A = 6.4. What is the optimal portfolio for this investor? In other words, what is the optimal weight (y) in the risky portfolio and what is the optimal weight (1-y) in T-bills? [5 Points]
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