You are a financial advisor, providing advice to Stanley.. You are aware that there are a variety of ways in which Stanley might make his capital allocation decision, and you aim to explore these with Stanley. For the purposes of this question, we assume Stanley can both borrow money and lend it in unlimited amounts at a rate of interest of 1%.

You have identified what you believe to be an optimal portfolio of risky assets P for Stanley. It includes the following asset classes:

Australian stocks 60%

International stocks 20%

Non-equity investments 20%

Portfolio P has an expected return of 11% and a level of risk given by the standard deviation of its annual returns of 20%.

5. You have recently read some research published by the CFA which has convinced you to attempt to optimise Stanleys capital allocation decision, using the diagram from investor utility (or certainty equivalence) in the financial economics lecture notes. Following a series of interviews, you estimate that Stanley has a coefficient of risk aversion of approximately 2.0. Advise him on the lending/borrowing decision which will maximise his expected utility, and on the proportions of Australian stocks, international stocks and non-equity investments in his optimal combined portfolio. Assess his resulting estimated expected return and risk.

(3 marks)