Finance Question Overview

Jeremy has $10k USD to invest and would like to hear your suggestions. You have provided him a complete portfolio investment plan. The complete portfolio is composed by a risky portfolio with return of 10.5% and standard-deviation of 15%, and a risk-free asset with return equals to X% (X is the third-digital number of your student ID. Say you have a student ID of 278123A, and the risk-free rate of return is then 8%. If the third-digital number is 0, then rf is 0). After comparison between these two choices, Jeremy prefers the risk-free option.

a), Determine the minimum value of Jeremy’s risk-aversion factor. Keep 3 decimals in your answer.                                                                                                                      [2 marks]

b), Using the minimum value of the risk-aversion factor you derived from 1) and the information from the question, calculate the optimal weighting for Risk-free and risky portfolio. Keep 3 decimals in your answer.                                                             [2 marks]

c), Using the weighting you derived from 2) and the information from the question, calculate Jeremy’s complete portfolio return and risk. Keep three decimals in your answer.  [2 marks]

d), Peter would like to invest $10k USD and ask your suggestions. You have provided a risky portfolio with return of 12.5% and standard-deviation of 18%, and a risk-free asset with return equals to X% (X is the fourth-digital number of your student ID. Say you have a student ID of 278123A, and the risk-free rate of return is then 1%. If the third-digital number is 0, then rf is 0). After comparison between these two choices, Peter prefers the risk-free option.

Repeat your calculations in 1) and 2), calculate the minimum value of Peter’s risk-aversion factor, and the optimal weighting between risk-free and risky portfolio. Any trend you have identified and why?                                                                                                   [3 marks]

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