You compute the optimal risky portfolio to have the expected return of 12% and standard deviation of 20%. The risk free rate is 4%. VWhat will be the standard deviation of the complete portfolio of risk free asset and the optimal risk portfolio, for a risk averse investor with risk aversion index A=6. O 1.11 O 3.33
You compute the optimal risky portfolio to have the expected return of 12% and standard deviation of 20%. The risk free rate is 4%. VWhat will be the standard deviation of the complete portfolio of risk free asset and the optimal risk portfolio, for a risk averse investor with risk aversion index A=6. O 1.11 O 3.33
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
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![### Optimal Risky Portfolio Calculation
**Question:**
You compute the optimal risky portfolio to have the expected return of 12% and standard deviation of 20%. The risk-free rate is 4%. What will be the standard deviation of the complete portfolio of the risk-free asset and the optimal risk portfolio for a risk-averse investor with risk aversion index A=6.
**Options:**
- 1.11
- 3.33
- 5.67
- 6.67
- None of the above
**Explanation:**
To solve this problem, you'll need to use the following formula for the standard deviation of the complete portfolio when combining a risk-free asset and the risky portfolio:
\[ \sigma_C = y \cdot \sigma_P \]
Where:
- \( \sigma_C \) is the standard deviation of the complete portfolio.
- \( y \) is the proportion of the risky asset in the complete portfolio.
- \( \sigma_P \) is the standard deviation of the risky portfolio.
Step-by-step, you typically first calculate the proportion \( y \) based on the risk aversion index \( A \), and the expected excess return over the risk-free rate.
For educational purposes, detailed calculations and explanations can follow up, ensuring students understand every step involved in achieving the correct answer.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff2413c70-c2c5-4667-869a-0656cb57ee0c%2F9a2235f2-b9c2-47c4-ad62-8451a7b1b6c3%2Fzwp7pb_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### Optimal Risky Portfolio Calculation
**Question:**
You compute the optimal risky portfolio to have the expected return of 12% and standard deviation of 20%. The risk-free rate is 4%. What will be the standard deviation of the complete portfolio of the risk-free asset and the optimal risk portfolio for a risk-averse investor with risk aversion index A=6.
**Options:**
- 1.11
- 3.33
- 5.67
- 6.67
- None of the above
**Explanation:**
To solve this problem, you'll need to use the following formula for the standard deviation of the complete portfolio when combining a risk-free asset and the risky portfolio:
\[ \sigma_C = y \cdot \sigma_P \]
Where:
- \( \sigma_C \) is the standard deviation of the complete portfolio.
- \( y \) is the proportion of the risky asset in the complete portfolio.
- \( \sigma_P \) is the standard deviation of the risky portfolio.
Step-by-step, you typically first calculate the proportion \( y \) based on the risk aversion index \( A \), and the expected excess return over the risk-free rate.
For educational purposes, detailed calculations and explanations can follow up, ensuring students understand every step involved in achieving the correct answer.
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