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Question 1 [10 marks You invest $3,000 in a complete portfolio. The complete portfolio is...

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Question 1 [10 marks You invest $3,000 in a complete portfolio. The complete portfolio is composed of risky and risk-free assets. The risky asset's expected annual rate of return is 14% and the annual standard deviation is 20%. There is a treasury bill with an annual rate of return of 6%. (a) How much money should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 10%? [4] (b) What portion (percentage) of investment should be invested in the risky portfolio if you want a portfolio that has an expected additional return of $300 after one year of investment period? (You are supposed to use simple interest model to answer this question) [3] (c) Calculate the Sharpe ratio of the investment portfolios formed with the following two compositions: Investment portfolio 1 Investment portfolio 2 Risky asset 70% 40% Risk-free asset 30% 60% Which option gives a higher Sharpe ratio? [3]

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