broad diversified bundle of stocks is expected to return RMbar = 9%, with a variance of ?sM2 = 36%2.?? The risk-free rate of return RF? = 1%.??
a. Gabrielle is somewhat cautious, so she invests 30% of her $10,000 portfolio in stocks, and 70% in risk-free Treasury bills.? What is the expected return, standard deviation and coefficient of variation for her portfolio?
b. ?Gabrielle's friend Thomas is more adventuresome.? He also has $10,000 in funds, but he invests twice that much in the stock market by using his stockbroker's margin account. (That is, he borrows another $10,000 to buy stocks). ?What is the expected return, standard deviation and coefficient of variation for his portfolio?? How much interest (in $) must he pay back to the broker per year?
c. Their friend Sarah wants to earn a return of 12%.? What should her portfolio weights be for stocks and for Treasury bills?? What is the standard deviation and CV for this portfolio?
d. ?Sketch a graph showing how these friends' portfolios are positioned along the capital market line.
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