Answer Happy

Question 2 Assume a perfect capital market in which investors are constrained to holding portfolios that consist only of a single risky asset, that borrowing or lending at a risk-free interest rate is possible, and that in equilibrium the following relationship between two risky securities i and j holds: Exp. ret. (%) Standard Dev. (%) Security i 26 15 Security 18 9 (a) What is the risk-free rate of interest in this market? (Hint: in equilibrium under the above conditions both securities must lie on the same market line). (b) If the investor wishes to hold a portfolio with a standard deviation of only 6%, what should be his investment strategy? (c) What would his investment strategy be if he wanted to reach an expected return of 24%?