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Question: a) Mr. X invested in a portfolio of risk-free asset and a risky portfolio. Mr. X's complete portfolio consists of 40% investment in risk-free asset and 60% investment in risky portfolio. Mr. Y invests 100% in the same risky portfolio. Expected return on Mr. Y's risky portfolio is 15%. Assume both Mr. X and Mr. Y are on the same Capital Allocation Line (CAL). If the risk-free rate is 5%, what is the expected return on Mr. X's complete portfolio?
b) If the standard deviation of the risky portfolio is 20%, numerically prove that both Mr. X and Mr. Y are on the same CAL
c) Now assume that investments in risky portfolio as indicated in [4(a)] above are optimal for both Mr. X and Mr. Y. It is apparent that Mr. X is more risk averse than Mr. Y, since Mr. Y invests 100% of his fund in risky portfolio, while Mr. X invests only 60%. Numerically derive a value to prove that Mr. Y is less risk averse than Mr. X. You must show all relevant calculations.
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