Short Question (SQ1) (15%)

Suppose two portfolios A and B which can evolve according to the two following equallylikely scenarios: Return - Portfolio A Return - Portfolio B Scenario 1 36% -2% Scenario 2 -16% 18% The risk-free rate is 5%.

(A) What are the expected returns of the two portfolios?

(B) What are the standard deviations of the two portfolios? Suppose a portfolio C that is composed of 50% of portfolio A and 50% of portfolio B

(C) What are the expected return and the standard deviation of portfolio C?

(D) If portfolio C is the optimal risky portfolio (tangent portfolio) for a mean-variance investor who also invests 10% of her capital in the risk-free asset, what is the risk aversion of this investor?