Problem:
You are the financial adviser to three individuals, a Young person with high risk tolerance, a Middle aged person with medium risk tolerance and an old person with low risk tolerance.
Here are the current conditions: Risk free asset is earning 12 % per year . Risky asset ( or market portfolio ) has expected return o f 30% per year and standard deviation of 40%. Using the mutual fund theorem or Separation theorem.
Required:
Question 1: Construct an appropriate portfolio (Mix of risky asset and risk free asset) for your young client and estimate the expected return and standard deviation of your young client for the coming year .
Question 2: Construct an appropriate portfolio for your middle aged client and estimate the expected return and standard deviation of your middle aged client.
Question 3: Construct an appropriate portfolio for your old client and estimate the exp ected return and standard deviation of your old client.
Question 4: If your middle aged client requires a portfolio with a standard deviation of 30%, what is i ts expected rate of return?
Note: Please show how you came up with the solution.