Capital allocation line derived from the risk-free

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The risky portfolio A consists of 1000 shares of BIT PLC and 4000 shares of DIMO PLC. Assume that BIT PLC has a share price of $6, an expected return of 18%, and a standard deviation of 22%. DIMO PLC has a share price of $4, an expected return of 14%, and a standard deviation of 20%. The correlation between the two is 0.6, and the risk-free rate of interest is 8%.

Required

a) Graph the Capital Allocation Line derived from the risk-free asset and portfolio A. (Label all axes and points carefully).

b) What fraction of your portfolio must you invest in A to have a portfolio standard deviation of 12%?

Reference no: EM132524019

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