Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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 15% and the standard deviation is 18.1%. The T-bill rate is 2.5%. (a) If you put 25% of your funds in T-bills and 75% 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 you have a degree of risk aversion of A = 5.6. 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] (d) What is the expected return and standard deviation on your optimal portfolio? Illustrate this point on your CAL graph you drew in Part (b). [4 Points] (e) Now suppose Maria has a degree of risk aversion of A = 4.0. What is the optimal weight (y) in the risky portfolio and what is the optimal weight (1-y) in T-bills for Maria? Briefly explain why Maria's optimal weight in the risky portfolio differs from yours? [5 Points]
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started