aMr. X invested in a portfolio of risk-free asset and a risky portfolio. Mr. X's complete portfolio
Question:
aMr. X invested in a portfolio of risk-free asset and a risky portfolio. Mr. X's complete portfolio consists of 40% investment in risk-free asset and 60% investment in risky portfolio. Mr. Y invests 100% in the same risky portfolio. Expected return on Mr. Y's risky portfolio is 15%. Assume both Mr. X and Mr. Y are on the same Capital Allocation Line (CAL). If the risk-free rate is 5%, what is the expected return on Mr. X's complete portfolio?
b) If the standard deviation of the risky portfolio is 20%, numerically prove that both Mr. X and Mr. Y are on the same CAL.
(c)Now assume that investments in risky portfolioas indicated in [(a)] aboveare optimal for both Mr. X and Mr. Y. It is apparent that Mr. X is more risk averse than Mr. Y, since Mr. Y invests 100% of his fund in risky portfolio, while Mr. X invests only 60%.Numerically derive a value to provethat Mr. Y is less risk averse than Mr. X. You must show all relevant calculations.