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Question 2 (10 Marks) You work for a fund that predominantly creates portfolios which mimic the return on various sectors. As part of your job, you also create portfolios which are customized to the risk aversion of the firm's clients. The following table contains the expected return on a selection of the fund's sector-based portfolios: Sector Real Estate Energy Health Care Information Technology Expected Return (p.a.) 7.5% 6.8% 9.4% 5.3% Standard Deviation 39% 30% 41% 26% The expected return on the market is 4.2% p.a., and the rate of return on T-bills is 2.1% p.a. Required: a) You have a client who is interested in a portfolio consisting of 80% Health Care, and the remaining 20% in Real Estate. The correlation coefficient of between the returns on these two sectors is 0.15. What is the expected return, standard deviation and Sharpe ratio, of this client's desired portfolio? (3 Marks) b) You advise your client that the desired portfolio above, consisting only of risky assets, may not be appropriate given her level of risk aversion. Upon having your client complete a questionnaire aimed at quantifying risk aversion, you determine that her coefficient of risk aversion is 2.2. Given the risky asset weightings indicated by your client in a) above, what is the composition of her complete portfolio, as well as the expected return and standard deviation of this portfolio? (4 Marks) c) What is the composition of the minimum variance portfolio, consisting of the Health Care and Real Estate sectors

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