You manage a risky portfolio with expected rate of return of 9% and standard deviation of 20%. Risk free rate of return is 3%.
a) What are the characteristics of feasible investment portfolios for your client? (What are the possible risk and return that you can create?) Identify this using a graph. What is this line called?
b) A client of yours has a utility function of U=E(r)-4Var(r) and 10000 to invest. How much should you invest in the risk-free asset and how much in risky portfolio? What is the expected return and standard deviation of your client's portfolio?