10. Suppose that you borrow $300 at the risk-free rate and invest this $300 toge

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10. Suppose that you borrow $300 at the risk-free rate and invest this $300 together with 51000 of your own wealth in a risky portfolio. What is your complete portolio's wcight in the rok-ftre asset? A, 130% B.-30% C.100% D.-20% For the following question, show all workings 11. Investors can form portfolios out of two assets: a risk-free asset (T-bill) with a rate of neturn of 5%, and a risky portfolio with an expected return of 15% and return 30%. Answer the following questions: standard deviation of a. Draw the capital allocation line.(1.25 points) b. The coefficients of risk aversion of Sara and James are 1 and 5, respectively. Compute each investor's optimal capital allocation to the risky portfolio. (I point) c. Interpret the results you get from part b.(1 point) d. Compute the expected return and standard deviation of the optimal portfolios for Sara and James (found in part b), respectively. (2 points) e Indicate Sara's and James's optimal portfolios on the capital allocation line. (1 point) Answer

Explanation / Answer

10. only 1st question:

We borrow $300 at risk free rate. Then we use this money along with $1000 of our own ie invest $1300 in a risky portfolio. So, the entire funds are in risky portfolio and nothing in risk free asset. But instead we have to pay interest back at risk free rate for $300 borrowed. So, logically 30% of 1000 is 300. So, on this money we have to pay interest at risk free rate. So, (B) (-30%) looks to be a good logical conclusion.

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