Question
You are given the following information: Risk-free Rate = 2.5% / year. Future State - One year from now Probability Return for Security A Return
You are given the following information: Risk-free Rate = 2.5% / year.
| Future State - One year from now | Probability | Return for Security A | Return for Security B |
| Very Good | 25.00% | 25.00% | -6.00% |
| Good | 25.00% | 15.00% | 10.00% |
| Average | 25.00% | 10.00% | 8.00% |
| Poor | 25.00% | -8.00% | 1.00% |
An investor approaches you with $1,000,000. She requires a SD of 5.00% on her portfolio. How will you allocate her investments into securities A, B, and the Risk-free to accomplish this? What is the Expected return of her portfolio?
- Draw a graph of the MVF, and the Capital Allocation Line
- Mark all relevant points including Rf, M*, P*, and the Investors Portfolio (and any other you deem informative and/or relevant).
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FINANCIAL & MANAGERIAL ACCOUNTING FOR DECISION MAKERS
Authors: Dyckman, Hanlon, Magee, Pfeiffer, Hartgraves, Morse
3rd Edition
1618532340, 9781618532343
