Question #2: Asset Allocation Suppose an investor has a choice between two assets: Janus Balanced Mutual Fund (a risky asset) and 30- day treasury bills (a risk-free asset). Standard Deviation (a) Portfolio Weight Expected Return [E(r)] Investment Janus Balanced Fund 8.58% 8.67% y 30 day T-bill 0.26% 1-y (a) Calculate the expected return and standard deviation of the overall portfolio---a portfolio consisting of a mixture of the risky asset and risk-free asset. [Hint: Your answers will be expressed as a function of y] (b) Use your answer from Part (a) to draw the capital allocation line (CAL). Be sure to label your axes.
Question #2: Asset Allocation Suppose an investor has a choice between two assets: Janus Balanced Mutual Fund (a risky asset) and 30- day treasury bills (a risk-free asset). Standard Deviation (a) Portfolio Weight Expected Return [E(r)] Investment Janus Balanced Fund 8.58% 8.67% y 30 day T-bill 0.26% 1-y (a) Calculate the expected return and standard deviation of the overall portfolio---a portfolio consisting of a mixture of the risky asset and risk-free asset. [Hint: Your answers will be expressed as a function of y] (b) Use your answer from Part (a) to draw the capital allocation line (CAL). Be sure to label your axes.
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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![Question #2: Asset Allocation
Suppose an investor has a choice between two assets: Janus Balanced Mutual Fund (a risky asset) and 30-
day treasury bills (a risk-free asset).
Investment
Expected Return
Standard Deviation (6) Portfolio Weight
[E(r)]
Janus Balanced Fund
8.58%
8.67%
30 day T-bill
0.26%
1-y
(a) Calculate the expected return and standard deviation of the overall portfolio---a portfolio consisting of
a mixture of the risky asset and risk-free asset. [Hint: Your answers will be expressed as a function of y]
(b) Use your answer from Part (a) to draw the capital allocation line (CAL). Be sure to label your axes.
Indicate the portfolio that consists only of the risk-free asset on your CAL as Point "A". Indicate the
portfolio that consists only of the risky asset on your CAL as Point "B".
(c) Calculate the slope of the Capital Allocation Line.
(d) Suppose that the investor chooses a portfolio weight of y = 1.5. Find the expected return and
standard deviation of the overall complete portfolio. [Assume that the borrowing rate is equal to the risk-
free rate]
(e) Suppose that the investor has a degree of risk aversion of A 2.5. What is the optimal portfolio for
this investor? In other words, what is the optimal weight (y) in the risky asset and what is the optimal
weight (1-y) in T-bills?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F6160dc10-b619-4dba-93d8-e8a5de35ac97%2F47ceeadb-0f5c-41ec-94fa-e0081399c27a%2Ffqkme3n_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Question #2: Asset Allocation
Suppose an investor has a choice between two assets: Janus Balanced Mutual Fund (a risky asset) and 30-
day treasury bills (a risk-free asset).
Investment
Expected Return
Standard Deviation (6) Portfolio Weight
[E(r)]
Janus Balanced Fund
8.58%
8.67%
30 day T-bill
0.26%
1-y
(a) Calculate the expected return and standard deviation of the overall portfolio---a portfolio consisting of
a mixture of the risky asset and risk-free asset. [Hint: Your answers will be expressed as a function of y]
(b) Use your answer from Part (a) to draw the capital allocation line (CAL). Be sure to label your axes.
Indicate the portfolio that consists only of the risk-free asset on your CAL as Point "A". Indicate the
portfolio that consists only of the risky asset on your CAL as Point "B".
(c) Calculate the slope of the Capital Allocation Line.
(d) Suppose that the investor chooses a portfolio weight of y = 1.5. Find the expected return and
standard deviation of the overall complete portfolio. [Assume that the borrowing rate is equal to the risk-
free rate]
(e) Suppose that the investor has a degree of risk aversion of A 2.5. What is the optimal portfolio for
this investor? In other words, what is the optimal weight (y) in the risky asset and what is the optimal
weight (1-y) in T-bills?
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