298 assignment

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a) Expected Return of Portfolio = Weight of Index Fund * Expected Return of Index Fund + Weight of Risk-Free Asset * Risk-Free Rate X= weight of the index fund, then the weight of the risk-free asset will be (1-x). Substituting the given values in the formula: 10% = x *15% + (1-x) * 2.5% x = 0.6 Therefore, the investor should invest 60% of his funds in the TSX index fund and the remaining 40% in the risk-free asset. b) To calculate the standard deviation of the portfolio from (a), we can use the following formula: Standard Deviation of Portfolio = Weight of Index Fund * Standard Deviation of Index Fund Substituting the given values in the formula: Standard Deviation of Portfolio = 0.6 * 20% = 12% Therefore, the standard deviation of the portfolio is 12%. c) To find the highest expected return the investor can achieve with a standard deviation of 30%, we can use the formula for the expected return of the portfolio from part (a), and solve for x: Expected Return of Portfolio = x * 15% + (1-x) * 2.5% = 0.1 Simplifying the equation: x = (0.1 - 2.5%) / (15% - 2.5%) = 0.5714 Therefore, the investor should invest approximately 57.14% of his funds in the TSX index fund and the remaining 42.86% in the risk-free asset to achieve an expected return of 10% with a standard deviation of 30%. The highest expected return he can achieve with a standard deviation of 30% is: Expected Return of Portfolio = 0.5714 * 15% + 0.4286 * 2.5% = 9.29%