Calculation Of Optimal Risky Portfolio And Expected Return

Question

The universe of available securities includes only two risky stock funds, X and Y, as well as T-bills. The data for the investment universe are shown in the table below. The correlation coefficient between the two funds is –0.3.

             Expected return          Standard deviation  

X                    0.15                            0.25  

Y                    0.35                            0.55  

T-bills             0.06                            0

a. Find the optimal risky portfolio and its expected return and standard deviation.

b. Find the slope of the Capital Allocation Line supported by T-bills and the optimal risky portfolio.

c. If an investor’s utility can be represented by U = E (r) - 6σ², how much will the investor invest in funds X and Y and in T-bills?

Total Word Count 135