Assume that you are an investor in the world as described by the capital asset pricing model. You can invest in stocks (which we will assume are the only risky assets) which are assumed to have an expected return of 15% and a standard deviation of 22%. The riskless asset is expected to earn 5%.

a. If you want the standard deviation of your portfolio to be 15% or less, how much of your portfolio would you invest in stocks? How much would you invest in the riskless asset?

b. If you wanted to earn an expected return of 20%, how would you combine stocks and the riskless asset to generate this return? What is the standard deviation of your portfolio?

Answer rating: 100% (QA)

a To determine the allocation between stocks and the riskless asset to achieve a portfolio standard ... View the full answer