shaan92
Mar 1, 2012, 05:48 AM
3. Mr Rooney has just finished reading a textbook about portfolio theory and he is keen to put his new-found knowledge into action with respect to savings of £1,000 he wishes to invest. He has identified the efficient frontier for portfolios of risky assets according to the following table.
Portfolio Expected return (%) Standard deviation (%)
A 4 3
B 6 4
C 8 5
D 10 8
E 10.6 11
F 11 14
He has also estimated that the redemption yield on short-dated Treasury bills is 3 percent and has identified the shape of a typical utility curve given his own attitude towards risk. Points that plots on the utility curve are as follows:
Expected return (%) Standard deviation (%)
8.8 1
9.0 3
9.5 5
10.2 6
11.2 7
Using this information, construct an appropriate diagram (using graph paper) that enables you to identify how Mr Rooney will split his investment between Treasury bills and the market portfolio.
Portfolio Expected return (%) Standard deviation (%)
A 4 3
B 6 4
C 8 5
D 10 8
E 10.6 11
F 11 14
He has also estimated that the redemption yield on short-dated Treasury bills is 3 percent and has identified the shape of a typical utility curve given his own attitude towards risk. Points that plots on the utility curve are as follows:
Expected return (%) Standard deviation (%)
8.8 1
9.0 3
9.5 5
10.2 6
11.2 7
Using this information, construct an appropriate diagram (using graph paper) that enables you to identify how Mr Rooney will split his investment between Treasury bills and the market portfolio.