You have been hired to manage the portfolio of Mr. Ahmed Bakri who is a high-net-worth investor. After discussion with Mr. Bakri you discovered that he is a risk lover investor with A=2. Accordingly, you want to construct a portfolio for Mr. Bakri that is composed of the following two risky asset classes namely: Stocks and Bonds. Your chief market strategist provides you with estimates of the investment characteristics of the two classes as well as the risk-free rate as follows: Asset Class Expected Return Standard Deviation Stocks 18% 25% Bonds 8% 12% Correlation -0.10 Risk Free Rate 6% Your supervisor asks you to Find the following: A) The optimal Risky Portfolio for the investor (Weights, Expected return and standard deviation). You need to explain why this unique portfolio is Chosen? (5pts) The optimal complete portfolio ((Weights, Expected return and standard deviation) that combines the optimal risky portfolio and the risk-free asset. (3pts) C) The composition of the different asset classes in the complete portfolio.

Answer rating: 100% (QA)

To find the optimal risky portfolio for the investor we need to consider the expected returns and standard deviations of the asset classes as well as the correlation between them The optimal risky por... View the full answer