PORTFOLIO ANALYSIS AND INVESTMENT

PORTFOLIO ANALYSIS AND INVESTMENT QUESTION Suppose that investor A holds a portfolio (portfolio A) consisting of five shares. The portfolio return is equal to 10% while its risk (st.dev) equals 12%. The market portfolio (consisting of all n shares) at this point of reference rewards investors with 15% and its risk is equal to 10%. a) Is this portfolio (portfolio A) an efficient one? Explain. (weight 10%) b) Suppose that the risk free interest rate is 2%. What is the diversification benefit of another investor (investor B) who holds a perfectly diversified portfolio (portfolio B) that embeds the same level of risk with that of portfolio A (i.e. s?=s?=12%)? Explain. (weight 25%) c) How this portfolio (portfolio B) can be constructed? Explain. (weight 25%) d) How does the existence of the risk free interest rate affect the optimum portfolio construction? Explain. (weight 40%)