Question #6: Asset Allocation and Leverage [24 Points] Suppose an investor has a choice between two assets: a risky asset and a risk-free asset Investment Expected Return E(r)l Standard Deviation (a) Portfolio Weight Risky Asset 14.25% 19,5% Risk-Free 2.6% 1-y (a) Calculate the expected return and standard deviation of the overall portfolio--a portfolio consisting of a mixture of the risky asset and risk-free asset. [Hint: Your answers will be expressed as a function of y] [6 Points] (b) Suppose that the investor chooses a portfolio weight of y 12 Points] 1.4. What does it mean that y > 1? (c) Find the expected return and standard deviation of the overall portfolio is the investor has chosen a weight of y 1.4. [Assume that the borrowing rate is equal to the risk-free ratel [5 Points] (d) Plot and label the following investment scenarios to derive the CAL: Scenario #1 : y #0 (Point A) Scenario #2: y-| (Point B) Scenario #3 : y 1.2 (Point C) What is the slope of the CAL? 17 Points] (e) What does the price of risk (A) measure? What would happen to y (the proportion invested in risky assets) should A increase? Explain your answer 14 Points)