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%.

4. Following a further interview with you, Stanley has a greater awareness of the potential risks of these investments to his future wealth, and changes his decision criterion for capital allocation to a maximum degree of risk on his combined portfolio of 15%. Advise him on his maximum expected return and on the weightings of Australian stocks, international stocks and non-equity investments in his combined portfolio. Identify the implications for his lending/borrowing decision.

(2 marks)