You have $10,000, which you want to invest a) There is a risk free asset with return rf 2 and a risky asset with expected rate of return r 6 with standard deviation 01 2 In a mean standard deviation diagram, sketch all possible portfolios that can be created Shortselling is NOT allowed b) Instead o...

12 If the normal at the point t on the parabola y4ax meet it again ...

You have $10,000, which you want to invest. a) There is a risk-free asset with return rf

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Question:

You have $10,000, which you want to invest.

a) There is a risk-free asset with return rf 2% and a risky asset with expected rate of return rı = 6% with standard deviation 01 2%. In a mean-standard deviation diagram, sketch all possible portfolios that can be created. Shortselling is NOT allowed.

b) Instead of shortselling, you can take out a loan up to $10,000 at 3% interest, which you have to invest in the assets from part a). Describe the set of all possible portfolios (treat taking the loan as shortselling another risk-free asset with return re 3%). Sketch these portfolios in another mean-standard deviation diagram.
c) From now on, consider only portfolios where the investor does not take out a loan and also invests in the risk-free asset at the same time. Why is this a reasonable assumption? Using sketches, describe what happens to the efficient frontier if re > 6%.