Suppose you manage a risky fund (call it P) with an expected return of 18% and a standard deviation of 25%. The risky fund is comprised of three stocks in the following investment proportions: A = 20%; B = 30%; C = 50%. The risk-free rate is 2%.

A. What is the equation of the CAL?

B. A client wishes to construct a portfolio with an expected return of 14%. What is the investment proportion y that she should invest in your risky fund?

C. What is the standard deviation of the portfolio in part (b)?

D. What are the weights in assets A, B, and C and the risk-free asset for the portfolio in part (b)?

E. Another client wishes to make an optimal allocation in risky portfolio P. What is his optimal allocation, y*? Assume that his degree of risk aversion is 3.0.

F. Based on your answers to (b&c) and (e), which of the two clients is more risk averse?