Jessica has $10,000. She can invest the money in (1) a corporate bond, (2) a stock, and
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Jessica has $10,000. She can invest the money in (1) a corporate bond, (2) a stock, and (3) a risk-free T-bill. The table below provides these assets’ expected returns and standard deviations: Bond (D) Stock (E) T-Bill Expected Return 7% 14% 2% Standard Deviation 15% 25% 0 The coefficient of correlation (ρDE) between the corporate bond and the stock is 20%. Jessica has a risk aversion A=4.
What are the optimal weights that Jessica chooses for the optimal risky portfolio and for the risk-free T-bill in her overall portfolio? How many dollars should Jessica invest in the corporate bond, the stock, and the T-bill, respectively in the optimal portfolio?
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