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Weight Port A Weight Port B Return Standard Sharpe Ratio Deviation 0% 100% 10 90 20 80 30 70 40 60 50 50 60 40
Weight Port A Weight Port B Return Standard Sharpe Ratio Deviation 0% 100% 10 90 20 80 30 70 40 60 50 50 60 40 70 30 80 20 90 10 100 0 Determine the optimal allocation of A & B and draw in the Capital Allocation Line (CAL). The approximate optimal allocation can be determined using a table like the one shown above. Or you can obtain a more precise optimal allocation using the formula shown in Chapter 7 (equation 7.13). Some students have used Excel's Solver function to find the optimal risky portfolio - that is also acceptable. When drawing the CAL on the efficient frontier graph plotted in Excel, you can manually draw a line starting at the risk free rate to the tangent point. 2. Find the optimal complete portfolio based on your client's indifference curve. Hint: Plot an indifference curve on the same graph you just created using the utility function formula from Chapter 6. To make things easier, you can use the same portfolio risk numbers from the table above and then calculate the expected return based on U = 9% and a risk aversion coefficient A = 10. Plot the indifference curve AND the opportunity set of risky assets on the same graph. Next determine the optimal complete portfolio. While this can be done graphically, you need to use the formula to determine a more precise allocation between the optimal risky portfolio and T-Bills
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