Question

You invest $100,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 20% and a standard deviation of 30%, and a Treasury bill with a rate of return of 8%. How much money should be invested in the risky asset to form a portfolio with an expected return of 17%?

a. $40,000

b. $60,000

c. $75,000

d. $25,000

Answer 1

The amount to be invested in risky asset is computed as shown below:

Let the amount to be invested in risky asset be Y. So, the amount invested in risk free asset will be $ 100,000 - Y

Expected return on portfolio x Amount invested in portfolio = Amount to be invested in risky asset x expected return on risky asset + Amount to be invested in risk free asset x expected return on risk free asset

0.17 x $ 100,000 = Y x 0.20 + ($ 100,000 - Y) x 0.08

$ 17,000 = 0.20 Y + $ 8,000 - 0.08 Y

0.12 Y = $ 9,000

Y = $ 75,000 Approximately

So, the correct answer is option c.

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answered by: anonymous