Question: Given that the risk-free rate is 5%, the expected return on the market portfolio is 20%, and the standard deviation of returns to the market

Given that the risk-free rate is 5%, the expected return on the market portfolio is 20%, and the standard deviation of returns to the market portfolio is 20%, answer the following questions:

  1. You have $100,000 to invest. How should you allocate your wealth between the risk free asset and the market portfolio in order to have a 15% expected return?

  1. What is the standard deviation of your portfolio in (a)?

  1. Now suppose that you want to have a portfolio, which pays 25% expected return. What is the weight in the risk free asset and in the market portfolio?

  1. What do these weights mean: What are you doing with the risk free asset and what are you doing with the market portfolio?

  1. What is the standard deviation of the portfolio in c?

  1. What is your conclusion about the effect of leverage on the risk of the portfolio?

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