10. Suppose that you borrow $300 at the risk-freerate and invest this $300 toget
ID: 2784183 • Letter: 1
Question
10. Suppose that you borrow $300 at the risk-freerate and invest this $300 together with S100 of your own wealth in a risky portfolio. What is your complete portóolio's wcight in the risk-ftee asset? A.130% B.-30% C.100% D.-20% For the following question, show all workings 11. Investors can form portfolios out of two assets: a risk-free asset (T-bill) with a rate of return of 5%, and a risky portfolio with an expected return of 15% and return standard deviation of 30%. Answer the following questions: a. Draw the capital allocation line. (1.25 points) b. The coefficients of risk avension of Sara and James are 1 and S, respectively, Compute each investor's optimal capital allocation to the risky portolio.(1 point) c. Interpret the results you get from part b.(1 point) d. Compute the expected return and standard deviation of the optimal portfolios for Sara and James (found in part b), respectively. (2 points) e. Indicate Sara's and James's optimal portfolios on the capital allocation line. (1 point) AnswerExplanation / Answer
TOTAL PORTFOLIO = Amt inv Risk free asset + Amt invested in risky asset
= -300 + 1300 = 1000
Wt in risk free asset = -300/1000 = 30% - B
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