Suppose an investor has a choice between two assets ansky asset and ansk tree as
ID: 2651263 • Letter: S
Question
Suppose an investor has a choice between two assets ansky asset and ansk tree asset. Expected Return E(r l Standard Deviation Portfolio Weight Investment 1200 15% Risky Asset 4.500 1-y Risk-Free (a) Calculate the expected return and standard deviation of the overall rtfolio a portfolio consisting of a mixture of the risky asset and risk free asset. [Hint: Your answers will be expressed as a function of y] [3 Point ts] (b) Suppose that the investor chooses a portfolio weight ofy 1.2. What does it mean that y 1? 12 Points] (c) Find the expected return and standard deviation of the overall portfolio is the investor has chosen a weight of y 2. [Assume that the borrowing rate is equal to the risk-free rate] [5 Points] (d Plot the following investment scenarios to derive the CAL Scenario 1 y 0 Scenario 2: y 1 Scenario 3: y 1.2 What is the slope of the CAL? Label Scenario 1 as "A", label Scenario #2 as "B" and label Scenario 3 as "C" on your CAL. 5 Points) (e) What would happen to y the proportion invested in risky ass aversion increase? Explain your answer. [2 Points]Explanation / Answer
Answer:(a) Expected return = 12+4.5/2=8.25%
Standard deviation of the portfolio=15%+0%/2=7.5%
Answer:(b) yes its greater than because its weight is greater than 1.
Answer:(c) Expected return=12*1.2+4.5*(-0.2)=14.4-0.9=13.5%
Standard deviation =15%*1.2=18%