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You invest $100 partly in a risky asset with an expected rate of return of 11%...

You invest $100 partly in a risky asset with an expected rate of return of 11% and a standard deviation of 21% and partly in T-bills with a yield of 4.5%. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 8.0%?

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Answer #1

Standard deviation of risky asset and correlation of its return with risky asset are zero.

This means, the second and third term in the equation are 0.

0.08 = w * 0.21

w = 38.10% --> Weight of Risky Asset

Weight of risk free asset = 1 - 38.10% = 61.90%

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