You survey a client and you conclude that she can tolerate a standard deviation _T of at

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Question:

You survey a client and you conclude that she can tolerate a standard deviation σ_T of at most 12%. You can allocate your client's wealth into a corporate bond fund, a common stock fund, and a U.S. T-Bills (risk -free), with the following means and standard deviations: E(R_i ) σ_i Bond fund (B) 15% 17% Common stock (S) 21% 35% U.S. T-Bill (r_f) 9.5% 0% The correlation between the stock fund and the bond fund is ρ_(B,S)=0.7.

Find the optimal risky portfolio.

Find the expected return and risk of the optimal risky portfolio.