There is an investment opportunity set where the optimal risky portfolio O has expected rate of return of 12% and volatility( or standard deviation) of 25%, and T-bill yields a risk free rate of 2%.
1. Investor A chooses to invest 75 % in the portfolio O and 25% in T-bill. Compute the expected return and volatility of her portfolio, and its Sharpe ratio.
2. Investor B has an expected risk premium of 7% to the risk-free asset return with her portfolio. Compute the composition of her portfolio and its Sharpe ratio.
3. Investor C has a volatility target of 20%. Compute the expected return and its Sharpe ratio.
4. Draw a CAL line and mark Sharpe ratio and all investors’ asset allocation choices(A, B, C).