Jack and Jill run a fund called JJ. The expected return of the JJ fund is 18% and standard deviation is 28%. The risk-free T-bill rate is 5%. JJ’s college classmates Austin Agressy (AA) and Connie Conservinia (CC), individually, decide to invest with JJ. AA wishes to earn an expected return of 20% while CC requires standard deviation to be 10%.
a. For AA, construct a portfolio (call it AA) that invests in the JJ Fund and T-bills. Find the proportion invested in JJ, the expected return and standard deviation of the AA portfolio.
b. For CC, construct a portfolio (call it CC) that invests in the JJ Fund and T-bills. Find the proportion invested in JJ, the expected return and standard deviation of the CC portfolio.
c. Calculatethereward-to-volatility(Sharpe)ratiofortheJJ,AA,andCCportfolios.
d. If the JJ fund consists of five stocks (Rat, Ox, Tiger, Rabbit, Dragon) with equal weights, for the portfolio AA, what are the proportions invested in each of the stocks and the T-bills?