Annual return
Year Market
1926 11.62%
1927 37.49%
1928 43.61%
1929 -8.42%
1930 -24.90%
1931 -43.34%
1932 -8.19%
1933 53.99%
1934 -1.44%
1935 47.67%
1936 33.92%
1937 -35.03%
1938 31.12%
1939 -0.41%
1940 -9.78%
1941 -11.59%
1942 20.34%
1943 25.90%
1944 19.75%
1945 36.44%
1946 -8.07%
1947 5.71%
1948 5.50%
1949 18.79%
1950 31.71%
1951 24.02%
1952 18.37%
1953 -0.99%
1954 52.62%
1955 31.56%
1956 6.56%
1957 -10.78%
1958 43.36%
1959 11.96%
1960 0.47%
1961 26.89%
1962 -8.73%
1963 22.80%
1964 16.48%
1965 12.45%
1966 -10.06%
1967 23.98%
1968 11.06%
1969 -8.50%
1970 4.01%
1971 14.31%
1972 18.98%
1973 -14.66%
1974 -26.47%
1975 37.20%
1976 23.84%
1977 -7.18%
1978 6.56%
1979 18.44%
1980 32.42%
1981 -4.91%
1982 21.41%
1983 22.51%
1984 6.27%
1985 32.16%
1986 18.47%
1987 5.23%
1988 16.81%
1989 31.49%
1990 -3.17%
1991 30.55%
1992 7.67%
1993 9.99%
1994 1.31%
1995 37.43%
1996 23.07%
1997 33.36%
1998 28.58%
1999 21.04%
2000 -9.11%
2001 -11.88%
2002 -22.10%
2003 28.70%
2004 10.87%
2005 4.91%
2006 16.10%
2007 6.43%
2008 -36.03%
2009 25.25%
2010 13.48%
2011 2.56%
2012 16.01%
2013 32.14%
2014 13.55%
2015 1.89%
Use the mean return and standard deviation of return (using the 90 annual returns) as the proxy for the risky portfolio’s expected return and risk. It turns out to be 12.0% and 19.9%.
Assume the latest annualized risk-free rate of return = 4%. Assume that the market portfolio is the proxy for the optimal risky portfolio. Assume correlation of market’s return with the risk-free return = 0.
1a) Compute the risk and expected return of the complete portfolios (various portfolios in the investment opportunity set). Start with 0% in the risky asset and go on to 200% in the risky asset (borrow $1 for every $1 of your own investment and invest $2 in risky asset) in increments of 5%.