You manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 37%. The T-bill rate is 5%.
Suppose that your client prefers to invest in your fund a proportion y that maximizes the expected return on the complete portfolio subject to the constraint that the complete portfolio’s standard deviation will not exceed 17%.
a. What is the investment proportion, y?
b. What is the expected rate of return on the complete portfolio?