soln_ch_7_cap_allocation.docVIP

CHAPTER 7: CAPITAL ALLOCATION BETWEEN THE RISKY ASSET AND THE RISK-FREE ASSET 1. Expected return = .3 ? 8% + .7 ? 18% = 15% per year.Standard deviation = .7 ? 28% = 19.6% 2. Investment proportions: 30.0% in T-bills .7 ? 25% = 17.5% in stock A .7 ? 32% = 22.4% in stock B .7 ? 43% = 30.1% in stock C 3. Your reward-to-variability ratio = = .3571 Clients reward-to-variability ratio = = .3571  5. a. E(rC) = rf + E[(rP) – rf] y = 8 + l0yIf the expected return of the portfolio is equal to 16%, then solving for y we get: 16 = 8 + 10 y, and y =