Question

After performing an optimal security selection and asset allocation using stocks ABC and XYZ and a T-bill, you found the following weights:

y=60%

w_ABC=70%

w_XYZ= 30%

You have $4000 to invest.

You will need to...

		Invest $2800 in ABC.
		Invest $2400 in the ORP.
		Invest $300 in XYZ.
		Borrow $1600.

Answer 1

While performing, Optimal security selection, we find with the optimal ratio of investment between the risky assets and risk free asset.

Weight y of optimal complete portfolio or Optimal risky portfolio ORP is calculated using the risk aversion of the investor

Now, based on the asset allocation, weight are decided for the risky assets in the optimal risky portfolio.

Here weight of optimal risky portfolio y = 60%

So, 60% of the total investment is invested in risky assets

So, Investment in optimal risky portfolio ORP = 60% of 4000 = $2400

40 % is invested in risk free assets

=> investment in risk free asset = 40% of 4000 = $1600

of the 60% of ORP, 70% is invested in ABC and 30% in XYZ

So, investment in ABC = 70% of 2400 = $1680

and Investment in XYZ = 30% of 2400 = $720

So, only option B is correct.