Answer to Question #82094 in Financial Math for Inga

Question

Suppose an investment professional is putting together a portfolio of two risky assets A, B and a risk-free asset. Assume that the tangency portfolio combining the two risky assets consists of 80% A and 20% B, and has expected return 8% and volatility of 5.5%. Suppose also that the risk-free rate of return for lending or borrowing is 2%.


(a) Find the equation of the efficient portfolio frontier.
(b) Findtheoptimalportfoliothatwouldgiveanexpectedreturnof10%andexplainhowyouwouldinvest a capital of $2,100,000 with lending or borrowing in this case.

Answer 1

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