Optimal portfolio weight to invest in optimal risky

Assignment Help Finance Basics

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.

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?
Using the data from problem 1, what is the expected return on this investor's complete portfolio?
Using the data from problem 1, what is the standard deviation of this investor's complete portfolio?
Using the data from problems 1,2, and 3, what is the Sharpe ratio of this investor's complete portfolio?

Reference no: EM132466106

Questions Cloud

Develop and Implement Business Plan Assignment : Develop a business plan to support the company's strategic and operational goals. Develop a plan for communicating the business plan to relevant parties

Identify industry that is undergoing intense competition : Identify an industry that is undergoing intense competition or is being featured in the business press.

Required rate of return on the project : The firm's tax bracket is 40%, and the required rate of return on the project is 10%.

Determine if smith the buyer qualifies for a cash discount : Determine if Smith, the buyer, qualifies for a cash discount, and who pays for shipping, Smith or Edwards.Smith Company purchased goods from Edwards

Optimal portfolio weight to invest in optimal risky : 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.

Explain the effects of each factor on interest rates : Describe two to three macroeconomic factors that influence interest rates in general. Explain the effects of each factor on interest rates.

What is the long-run average monthly volatility : What is the long-run average daily variance? What is the long-run average monthly volatility? Assume that there are 21 trading days in a month.

What is the final adjusted sale price of the comparable : Making adjustments in the order found in Exhibit 7-6 in the textbook, what is the final adjusted sale price of the comparable?

What is resulting effect on financial statement : You sold all but one of the quilts you made for $17.15 (selling price) . What is resulting effect on the following financial statement elements?

User Account

All Pages