The universe of available securities includes only two risky stock funds, X and Y, as well as T-bills. The data for the investment universe are shown in the table below. The correlation coefficient between the two funds is –0.3.
Expected return Standard deviation
X 0.15 0.25
Y 0.35 0.55
T-bills 0.06 0
a. Find the optimal risky portfolio and its expected return and standard deviation.
b. Find the slope of the Capital Allocation Line supported by T-bills and the optimal risky portfolio.
c. If an investor’s utility can be represented by U = E (r) - 6σ2, how much will the investor invest in funds X and Y and in T-bills?
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