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 Standard Deviation (0) Portfolio Weight Expected Return [E(r)] Risky Asset 10.4% 13.1% y Risk-Free 1.2% 0 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 = 1.3. What does it mean that y>1? [2 Points] (C) Find the expected return and standard deviation of the overall portfolio is the investor has chosen a weight of y = 1.3. [5 Points] (d) Plot and label the following investment scenarios to derive the CAL: Scenario #1: y=0 (Point A) Scenario #2: y = 1 (Point B) Scenario #3: y= 1.3 (Point C) What is the slope of the CAL? Round your answer to 4 decimal places. [7 Points] If y = 0, E(rc) = 0.012 and Op= 0 If y=1, E(rc) = 0.104 and Op= 0.131 If y = 1.3, E(rc) = 0.1316 and Op= 0.1703 (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. [4 Points] 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 Standard Deviation (0) Portfolio Weight Expected Return [E(r)] Risky Asset 10.4% 13.1% y Risk-Free 1.2% 0 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 = 1.3. What does it mean that y>1? [2 Points] (C) Find the expected return and standard deviation of the overall portfolio is the investor has chosen a weight of y = 1.3. [5 Points] (d) Plot and label the following investment scenarios to derive the CAL: Scenario #1: y=0 (Point A) Scenario #2: y = 1 (Point B) Scenario #3: y= 1.3 (Point C) What is the slope of the CAL? Round your answer to 4 decimal places. [7 Points] If y = 0, E(rc) = 0.012 and Op= 0 If y=1, E(rc) = 0.104 and Op= 0.131 If y = 1.3, E(rc) = 0.1316 and Op= 0.1703 (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. [4 Points]