Question: Consider two asset classes: US Equities and Corporate Bonds. US Equities has the expected return of 15% and the return standard deviation of 20%. Corporate

Consider two asset classes: US Equities and Corporate Bonds. US Equities

Consider two asset classes: US Equities and Corporate Bonds. US Equities has the expected return of 15% and the return standard deviation of 20%. Corporate Bonds the expected return of 4% and the return standard deviation of 6%. The correlation between the two returns is 0.10. The risk free rate is 2%. a. a. Please describe the tangency portfolio. What are the allocations between equities and bonds? What is the return and the return standard deviation of the tangency portfolio? (2 points) b. Mary is quite risk averse. She would like to have an investment portfolio with the standard deviation of 5%. Please describe the optimal asset allocation for Mary: What are the weights of the risk free, asset, equities and bonds? What is the expected return of Mary's portfolio? (2 points) C. Alice would like to earn an expected return of 12%. Please describe the optimal asset allocation for Alice: What are the weights of the risk free asset, equities and bonds? What is the standard deviation of Alice's portfolio? (2 points) Consider two asset classes: US Equities and Corporate Bonds. US Equities has the expected return of 15% and the return standard deviation of 20%. Corporate Bonds the expected return of 4% and the return standard deviation of 6%. The correlation between the two returns is 0.10. The risk free rate is 2%. a. a. Please describe the tangency portfolio. What are the allocations between equities and bonds? What is the return and the return standard deviation of the tangency portfolio? (2 points) b. Mary is quite risk averse. She would like to have an investment portfolio with the standard deviation of 5%. Please describe the optimal asset allocation for Mary: What are the weights of the risk free, asset, equities and bonds? What is the expected return of Mary's portfolio? (2 points) C. Alice would like to earn an expected return of 12%. Please describe the optimal asset allocation for Alice: What are the weights of the risk free asset, equities and bonds? What is the standard deviation of Alice's portfolio? (2 points)

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