Suppose your optimal risky portfolio has an expected return E(rp) = 6.5% and a standard deviation as 6%. You can also invest in a risk-free asset withrf= 3.5%. Your risk aversionA= 1/15.
(a)If your complete portfolio has a standard deviation of 3%, what is your expected return?
(b)What is the optimal allocation that maximizes your utility? Write down the portion (in a number between 0 and 1, or greater than 1 if you are buying on margin) in the risky portfolio.
(c)Suppose when you are buying on margin, your broker charges you a 4% interest rate, instead of the risk-free rate. What is your expected return for your complete portfolio, using the optimal allocation weight in (b), in this case?
