9.Discuss how to create efficient portfolios when the raw materials are two risky assets and a riskless asset. Answer: Let us now summarize what we have learned about creating efficient portfolios when the raw materials are two risky assets and a riskless asset.There is a single portfolio of the two risky assets that it is best to combine with the riskless asset.We call this particular risky portfolio the optimal combination of risky assets.The preferred portfolio is always some combination of this tangency portfolio and the riskless asset 10.The expected rate of return on a risky asset is 0.19 and the riskless rate is 0.05.The standard deviation of the risky asset is 0.3. a.What happens to the slope of the trade-off line if the riskless rate decreases to 0.04 and the expected return on the risky asset increases to 0.2? b.What happens to the slope of the trade-off line if the riskless rate increases to 0.06 and the expected return on the risky assets increases to 0.2? Answer: a.Slope=(E(r)-rp/os Slope oforiginal scenario:(0.19-0.05)/0.3 =0.14/0.3 =0.467 Slope in revised scenario:(0.20-0.04)/0.3 0.16/0.3 0.533 The slope rises from 0.467 to 0.533. b. Slope of original scenario:(0.19-0.05)/0.3 0.14/0.3 0.467 Slope in revised scenario:(0.20-0.06)/0.3 0.14/0.3 =0.467 The slope is unchanged. 12-1212-12 9. Discuss how to create efficient portfolios when the raw materials are two risky assets and a riskless asset. Answer: Let us now summarize what we have learned about creating efficient portfolios when the raw materials are two risky assets and a riskless asset. There is a single portfolio of the two risky assets that it is best to combine with the riskless asset. We call this particular risky portfolio the optimal combination of risky assets. The preferred portfolio is always some combination of this tangency portfolio and the riskless asset 10. The expected rate of return on a risky asset is 0.19 and the riskless rate is 0.05. The standard deviation of the risky asset is 0.3. a. What happens to the slope of the trade-off line if the riskless rate decreases to 0.04 and the expected return on the risky asset increases to 0.2? b. What happens to the slope of the trade-off line if the riskless rate increases to 0.06 and the expected return on the risky assets increases to 0.2? Answer: a. Slope = (E(rs) – rf)/σs Slope of original scenario: (0.19 – 0.05)/0.3 = 0.14/0.3 = 0.467 Slope in revised scenario: (0.20 – 0.04)/0.3 = 0.16/0.3 = 0.533 The slope rises from 0.467 to 0.533. b. Slope of original scenario: (0.19 – 0.05)/0.3 = 0.14/0.3 = 0.467 Slope in revised scenario: (0.20 – 0.06)/0.3 = 0.14/0.3 = 0.467 The slope is unchanged