Consider the following properties of the returns of asset P: Asset E(r) P: 15% and volatility of 22% : In addition, there exists a risk-free asset that has a return rate of 7%.

1. Plot the capital allocation line for a portfolio that includes the asset P and the risk-free asset.

2. Plot the risk-return indifference curves for a portfolio that has a 55% weight on asset P and 45% weight on the risk-free asset, when the coeficient of risk aversion is 1:4, 2:5; 3:0.

3. How risk averse an investor must be for the portfolio that has a 55% weight on asset P and 45% weight on the risk-free asset to be optimal?

Answer rating: 100% (QA)

To tackle these questions lets proceed step by step 1 Capital Allocation Line CAL The CAL represents ... View the full answer