5. In class we saw that over the last twenty years, the averagereturn and standard deviation of retu

5. In class we saw that over the last twenty years, the averagereturn and standard deviation of returns of large cap value stocksare 8.5% and 15.2%, and the average return and standard deviationof returns of fixed income portfolio are 5.3% and 3.4%. Supposethat over the next year the expected returns and risks of the twoasset classes will remain the same as what happened in the lasttwenty years. Further assume that you can invest in a risklessasset with 2% return over the next year (you can also borrow moneywith an interest rate of 2%). Suppose that you can invest in therisk-free asset, and either the large cap value stocks portfolio orthe fixed income portfolio. Which portfolio will you choose andwhy? (4 points) . . .

 

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