The answer given previously related to the Minimum Variance Portfolio. Please note this question is about the Optimal Risky Portfolio:

You are a fund manager in ABC asset management and you wish to invest in two different funds.

Fund A is a stock fund and fund B is comprised of long-term government and corporate bond.

The expected return and standard deviation of the funds are as follows:

Expected return and standard deviation of Fund A is ER = 8%SD = 12%

Expected return and standard deviation of Fund B is ER = 13%SD = 20%

The correlation between funds A and B is 0.30.

The risk free rate is 6%. Assume there is no short selling.

In what proportions should you invest in each of the two funds to achieve the Optimal Risky Portfolio.Show your workings.

What is the Expected Return, Standard Deviation and Sharpe Ratio of the Portfolio

Answer rating: 100% (QA)

1 Calculate expected return and standard deviation of each asset Fund ... View the full answer