Upon graduation from ULCA, you worked for a large money management compa- ny. Eventually you believe you can be successful on your own and you decided to start your own investment management company.

One of your first clients currently has $8,000,000 invested in a portfolio with an expected return of 12% and a volatility of 10%. You know that all the assumptions of the efficient (tangent) portfolio hold. The efficient portfolio has an expected re- turn of 17% and a volatility of 12%. The risk-free rate is 5.00%. Assume you charge no fees.

A) (15 points) You client asks you to maximize their expected return without in-

creasing their risk. To achieve this goal, how much money do you invest in the risk free rate and how much in the efficient portfolio?

B) (10 points) What is the maximum expected return they can expect for your so- lution in part (A)?

Answer rating: 100% (QA)

SOLUTION A To maximize the expected return without increasing the risk we need to find the optim... View the full answer