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Problem: Suppose we have a risk-free asset, which delivers return rf = 0.05 and a risky asset with expected return E(R) = 0.1 and standard deviation σ = 0.1. Please answer following two questions.
Required:
1. Suppose you have $10,000 and plan to invest in these two assets. How much (in dollar amount) do you need to invest in risk-free asset and the risky asset respectively, to form a portfolio with expected return equals 0.08? What's the standard deviation of this portfolio?
2. Using the risk-free and the risky asset provided, can you form a portfolio with expected return E(Rp) = 0.15 and standard deviation σp = 0.10, i.e. form a "better" portfolio compared to the risky asset? Why?
3. Using the risk-free and the risky asset provided, can you form a portfolio with expected return E(Rp) = 0.075 and standard deviation σp = 0.10, i.e. form a "worse" portfolio compared to the risky asset? Why?
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