Problem
Suppose that you are an investment advisor, currently advising to some of Saudi wealthy investors. You manage a risky portfolio with expected rate of return of 15%p.a and a standard deviation of 20%. The T-bill rate is 4%p.a. one of your client want to invest 60% in each stock market and remaining in risk-free asset.
1. Determine the expected return and standard deviation for your client.
2. Now assume that your client wishes to achieve the expected return if 12%. Determine the client's proportion of investment in stock market. If your client wants a return more that 15% what will be your advice to him?
3. Draw the capital allocation line for you and your client and calculate ratio for you and your client.