Question 6 (23 Points)

You are the new investment manager of Michael and Ariel. You received from the previous investment manager of Michael and Ariels partial information regarding their portfolios:

- Both have an optimal portfolio.

- The expected return in Michaels portfolio is 6%.

- The SD in Ariels portfolio is 12%.

You know that the current risk-free interest rate is 5% and the market portfolio has an expected return of 8% and a SD of 10%.

a. What is the proportion of each brothers investment in a risk-free asset out of their portfolio?

Answer: the proportion of Michaels investment in a risk-free asset out of his portfolio is __________%

the proportion of Ariels investment in a risk-free asset out of her portfolio is __________%

b. Is it possible to rank the brothers risk preference? Explain.

c. What is the beta in each brothers portfolio?

Answer: the beta of Michaels portfolio is ___________ the beta of Ariels portfolio is __________

d. Suppose that today Michael and Ariel received an offer to buy a share with an expected return of 6% and beta of 0.3. Will they accept the offer?

Answer: Michael will accept / not accept the offer

Ariel will accept / not accept the offer