Assume that you manage a risky portfolio with an expected rate of return of 20% and a
Question:
Assume that you manage a risky portfolio with an expected rate of return of 20% and a variance of 25%. The risk-free rate is 5%.
a) Draw capital allocation line considering the scenario:(i) y=0, (ii) y=1 and (iii) y=1.50;where,y is proportions of your investment in risky assets.
b)Your client chooses to invest $12,000 in your fund and $8,000 in a risk-free asset. What is the reward-to-variability ratio of your client’s overall portfolio?
c)Suppose this client decides to invest in your risky portfolio a proportion (y) that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio’s standard deviation will not exceed 30%.
I. What is the investment proportion in risky portfolio (y)?
II. What is the expected rate of return on your client’s overall portfolio?