Daniel wants to invest $48,000 in securities. The securities available are two risky (Alpha and Gamma)...

Transcribed Image Text:

Daniel wants to invest $48,000 in securities. The securities available are two risky (Alpha and Gamma) and one risk-free asset (Theta). The corresponding data apply to them: Security Alpha Gamma Theta Expected Return Standard Deviation 7% 25% 4% 18% 43% 0% Assume that the correlation between Alpha and Gamma is 0.3 and that the proportion of Alpha in the optimal risky portfolio is 50%. Moreover, Daniel is known to have a coefficient of risk aversion equal to 3. a) What is the expected return of the optimal risky portfolio? b) What is the standard deviation of the optimal risky portfolio? c) How much (in $) should Daniel invest in Gamma? Daniel wants to invest $48,000 in securities. The securities available are two risky (Alpha and Gamma) and one risk-free asset (Theta). The corresponding data apply to them: Security Alpha Gamma Theta Expected Return Standard Deviation 7% 25% 4% 18% 43% 0% Assume that the correlation between Alpha and Gamma is 0.3 and that the proportion of Alpha in the optimal risky portfolio is 50%. Moreover, Daniel is known to have a coefficient of risk aversion equal to 3. a) What is the expected return of the optimal risky portfolio? b) What is the standard deviation of the optimal risky portfolio? c) How much (in $) should Daniel invest in Gamma? Daniel wants to invest $48,000 in securities. The securities available are two risky (Alpha and Gamma) and one risk-free asset (Theta). The corresponding data apply to them: Security Alpha Gamma Theta Expected Return Standard Deviation 7% 25% 4% 18% 43% 0% Assume that the correlation between Alpha and Gamma is 0.3 and that the proportion of Alpha in the optimal risky portfolio is 50%. Moreover, Daniel is known to have a coefficient of risk aversion equal to 3. a) What is the expected return of the optimal risky portfolio? b) What is the standard deviation of the optimal risky portfolio? c) How much (in $) should Daniel invest in Gamma? Daniel wants to invest $48,000 in securities. The securities available are two risky (Alpha and Gamma) and one risk-free asset (Theta). The corresponding data apply to them: Security Alpha Gamma Theta Expected Return Standard Deviation 7% 25% 4% 18% 43% 0% Assume that the correlation between Alpha and Gamma is 0.3 and that the proportion of Alpha in the optimal risky portfolio is 50%. Moreover, Daniel is known to have a coefficient of risk aversion equal to 3. a) What is the expected return of the optimal risky portfolio? b) What is the standard deviation of the optimal risky portfolio? c) How much (in $) should Daniel invest in Gamma?

Answer rating: 100% (QA)

SOLUTION a To calculate the expected return of the optimal risky portfolio we need to use the capital asset pricing model CAPM which states that the expected return of an asset is equal to the riskfre... View the full answer