Question

Your human capital is risky and positively correlated with the overall performance of the stock market. According to Modern Portfolio Theory, you have concluded that you should invest 75 % of your wealth to the optimal risky portfolio of stocks and 25 % to risk-free bonds. You are currently young (say 30 years). If your human capital is worth $ 602 in present value terms and you have $ 231 in financial wealth, how much should you invest in risk-free bonds in your financial portfolio (in $)?

Answer 1

According to modern portfolio theory the allocation of assets must be done optimally in order to attend the best benefits

Portfolio weights must be adequately defined in order to maximize the gains.

in this case it has been decided according to the modern portfolio theory that 75% of overall portfolio weight will be allocated to assets and 25% of overall portfolio, it would be allocated to bonds.

The overall portfolio weight is $231 which is also the financial wealth of the individual .my allocation to bond should be-

= [ 25% of 231]

= $57.75

= $58

So show the allocation to the risk free bonds would be $ 58.