Question: The risk-free rate is 1% while the expected return and standard deviation of the market portfolio (S&P 500) are 9% and 19%, respectively. (a) What

The risk-free rate is 1% while the expected return and standard deviation of the market portfolio (S&P

500) are 9% and 19%, respectively.

(a) What is the standard deviation of a combination of risk-free security and S&P 500 that has an

expected return of 12%? What is its probability of loss? Assume that the S&P 500 returns have

a normal probability distribution.

(b) The optimal allocation to S&P 500 for an investor is 60%. What will be the optimal allocation to

S&P 500 for this investor if the standard deviation of S&P 500 returns were to increase to 25%?

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