Ann has $10k Australian dollars to invest in a complete portfolio. You have provided her a risky
Question:
Ann has $10k Australian dollars to invest in a complete portfolio. You have provided her a risky portfolio with return of 10.5% and standard-deviation of 15%, and a risk-free asset with return equals to 0%. After comparison between the risky and risk-free asset, Ann generally prefers the risk-free asset, as she is risk-averse and the highest risk level she could accept is indifferent between risk-free and risky asset.
A) Calculate the minimum value of Ann's risk-aversion factor.
B) Using the minimum value of the risk-aversion factor you derived from 1) and the information from the question, calculate the optimal weighting for the risk-free asset and the risky portfolio.
C) Using the weighting you derived from 2) and the information from the question, calculate the return and risk of Ann's complete portfolio.
D) John has $10k Australian dollars to invest in a complete portfolio. You have provided him a risky portfolio with return of 12.5% and standard-deviation of 18%, and a risk-free asset with return equals to 0% After comparison between the risky and risk-free asset, John generally prefers the risk-free asset, as he is risk-averse and the highest risk level he could accept is indifferent between risk-free and risky asset. Repeat your calculations in A) and B), calculate the minimum value of John's risk-aversion factor, and the optimal weighting between risk-free and risky portfolio. Have you identified any trend after the calculation? Why?
Fundamentals of Investments Valuation and Management
ISBN: 978-0077283292
5th edition
Authors: Bradford D. Jordan, Thomas W. Miller