An investor faces the following prospect: if he invests 100 in company A, in one...
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An investor faces the following prospect: if he invests 100 in company A, in one year he will get back 50 + 5T pounds. If he invests 100 in firm B, in one year he will get back 100 151 pounds. The variable T is a random variable with an expected value of 4 and standard deviation of 2. a. What is the expected value and standard deviation of a generic portfolio where the investor allocates a fraction x of his 100 to investing in company A and 1 - x to investing in company B? [15 marks] b. What is the investment allocation with the lowest risk? [10 marks] c. Draw the budget curve where the standard deviation is on the horizontal axis and the expected return is on the vertical axis. [15 marks] d. Show that the optimal value of x cannot be less than 75%. [10 marks]
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