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Optimal portfolio weight to invest in optimal risky

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Reference no: EM132466106

Consider the following capital market: a risk-free asset yielding 3.00% per year and a mutual fund consisting of 75% stocks and 25% bonds. The expected return on stocks is 13.95% per year and the expected return on bonds is 4.50% per year. The standard deviation of stock returns is 42.00% and the standard deviation of bond returns 18.00%. The stock, bond and risk-free returns are all uncorrelated. 

  1. An investor has the utility function where the investor's utility score = expected return - 1/2 x A x variance, and the investor is considering investing in the optimal risky portfolio and the risk-free asset (risk-free rate: 3%). If the investor's coefficient of risk aversion constant A is 1.75, what is their optimal portfolio weight to invest in the optimal risky portfolio to form their complete portfolio? 
  2. Using the data from problem 1, what is the expected return on this investor's complete portfolio?
  3. Using the data from problem 1, what is the standard deviation of this investor's complete portfolio?
  4. Using the data from problems 1,2, and 3, what is the Sharpe ratio of this investor's complete portfolio?

Reference no: EM132466106

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