Use these data for the following questions:
You manage a risky portfolio with expected rate of return of 18% and standard deviation of 28%. The T-bill rate (lending rate) is 8% and borrowing rate is 10%. Your client’s degree of risk aversion is A = 3.5.
a. Draw the CAL (capital allocation line with different borrowing and lending rates) on an expected return-standard deviation diagram.
b. Calculate the Sharpe-Ratio (reward-to-variability ratio) of the risky portfolio assuming you can borrow and lend at the same rate, 8%.
c. What proportion, y, of the total investment should be invested in your fund?
d. What is the expected return and standard deviation of the rate of return on your client’s optimized portfolio?