Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You survey a client and you conclude that this client s level of risk aversion is commensurate with a target standard deviation = 1 5

You survey a client and you conclude that this clients level of risk aversion is commensurate with a target standard deviation =15%.(This means that the client would want to allocate funds into a portfolio with a standard deviation greater than this number). You can allocate your clients wealth into a corporate bond fund, a common stock fund, and a U.S. T- Bills (risk -free), with the following means and standard deviations:
Bond fund 14%
Common stock 21%
U.S. T-Bill (5%
20%39%0%
The correlation between the stock fund and the bond fund is =0.4.
Find the proportions (weights) the investor should allocate into the common stock fund (&), the bond
fund (), and the risk-free asset ) so that the investor achieves the maximum return given the $#
desired target standard deviation =%. Hints:
A) First find the weights & and $ that form the optimal risky portfolio.
B) Next, find the expected return ((")*+)(")*+ and standard deviation of the optimal risky
portfolio you found in A).
C) Finally, obtain what proportion should be assigned into the optimal risky portfolio in A) and the
risk-free asset such that the target standard deviation !=15% is achieved.
D) Now find the expected return and standard deviation of the final portfolio from C).

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Finance questions