Treasury bills and ,market portfolio
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.
