# Expected return problem

Assume that you can borrow and lend at a riskless rate of 5% and that the tangency portfolio of risky assets has an expected return of 13% and a standard deviation of return of 16%.

(a) What is the highest level of expected return that can be obtained if you are willing to take on a standard deviation of returns that is at most equal to 24%? Answer and explain below.

(b) What is the fraction of your wealth (in percent) invested in the riskless asset in the portfolio you found in part (a) (the mean-variance efficient portfolio with a standard deviation of 24%)? What is the fraction invested in the tangency portfolio of risky assets?

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#### Solution Preview

(a) The maximum Sharpe ratio = (Rp - Rf)/ σp

Rp= return of portfolio

Rf= risk-free ...

#### Solution Summary

Calculation of the maximum Sharpe ratio & max return then finding the fraction invested in the tangency portfolio of risky assets.