You manage a risky portfolio with expected rate of return of 9% and standard deviation of 13%. 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 he 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? What is its sharp ratio?
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