Question #4: The Optimal Portfolio [20 Points You are attempting to construct an optimal portfolio consisting of T-bills

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Question 4 The Optimal Portfolio 20 Points You Are Attempting To Construct An Optimal Portfolio Consisting Of T Bills 1 (45.54 KiB) Viewed 43 times

Question #4: The Optimal Portfolio [20 Points You are attempting to construct an optimal portfolio consisting of T-bills and a risky portfolio. The expected return on the risky portfolio is 14.8% and the standard deviation is 19.4%. The T-bill rate is 2.4%. (a) If you put 31% of your funds in T-bills and 69% in the risky portfolio, what is the expected return and standard deviation of your overall portfolio? Round your answers to 4 decimal places. [3 Points] (b) Construct a Capital Allocation Line for a portfolio consisting of the T-bills and the risky portfolio. Draw the line and indicate the y-intercept and the point where the portfolio is entirely made up of risky assets. What is the slope of this line? [3 Points] (C) Suppose that you have a degree of risk aversion of A - 4.9. What is the optimal portfolio for this investor? In other words, what is the optimal weight (y) in the risky portfolio and what is the optimal weight (1-y) in T-bills? [5 Points] (d) What is the expected return and standard deviation on your optimal portfolio? Round your answers to 4 decimal places. Illustrate this point on your CAL graph you drew in Part (b). Label this point as Point "A". [4 Points (e) Now suppose Maria has a degree of risk aversion of A = 6.4. What is the optimal weight (y) in the risky portfolio and what is the optimal weight (1-y) in T-bills for Maria? Briefly explain why Maria's optimal weight in the risky portfolio differs from yours? [5 Points)