Chapter 7, Problem 6PS

Summary Introduction

To calculate: The risk-free rate to the opportunity set which tangent is to be drawn. The result of the expected return and the standard deviation of the optimal portfolio are also to be determined.

Introduction: The portfolio risk is defined as the combination of assets which carries its own risk with each investment.

The standard deviation is used to determine that in which manner the values from a data set vary from its mean value. This is calculated by the square root of the variance.

  $standarddeviation=\sqrt{variance}$

The expected return is defined as the return which is obtained on the risky asset that is expected in future.