Youve just decided upon your capital allocation for the next year You believe the expected return should be 10 and the standard deviation is 28 The risk free rate is 5 As the market moves, you would like to raise the expected return, lower the standard deviation of your risky portfolio, and adjust the risk free rate to 4 Will you increase or decrease your allocation to your risky portfolio given the same expected return When the risk free rate increases because of inflation, investors should reduce their allocation to risky portfolio given the same expected return Do you agree Why

Question: Youve just decided upon your capital allocation for the next year. You believe the expected return should be 10% and the standard deviation is 28%.

You’ve just decided upon your capital allocation for the next year. You believe the expected return should be 10% and the standard deviation is 28%. The risk-free rate is 5%. As the market moves, you would like to raise the expected return, lower the standard deviation of your risky portfolio, and adjust the risk-free rate to 4%. Will you increase or decrease your allocation to your risky portfolio given the same expected return?

When the risk-free rate increases because of inflation, investors should reduce their allocation to risky portfolio given the same expected return. Do you agree? Why?

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