Question

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 2% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 40% and 60%, respectively. X has an expected rate of return of 0.10 and variance of 0.0081, and Y has an expected rate of return of 0.06 and a variance of 0.0036. The coefficient of correlation, rho, between X and Y is 0.45. If you decide to hold a complete portfolio that has a standard deviation of expected returns, i.e., the risk or sigma, of 10%

What is the expected returns for this complete portfolio C

Answer 1

The complete Portfolio is composed of treasury bills 50% and risky portfolio 50%

Expected returns for complete portfolio = Return on treasury x 50% + Return on Risky Portfolio x 50%

Expected returns for complete portfolio = 2% x 50% + 7.6% x 50%

Expected Return for complete portfolio =4.8%

Return on treasury bills is 2%

Return on Risky Portfolio = Wx x Rx + Wy x Ry

Return on Risky Portfolio = .40 x 10% + .60 x 6%

Retrun on Risky Portfolio = 7.60%

Wx = Weight in security X i.e. 40%

Wy = Weight in security Y i.e. 60%

Rx = Return of security X i.e. 10%

Ry= Return of security Y i.e. 6%

For any other clarrification please comment.

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