Question

You are considering investing $2,300 in a complete portfolio.
The complete portfolio is composed of Treasury bills that pay 4%
and a risky portfolio, |

Answer #1

Amount invested | 2300 | |||

Risk-free rate | 4% | |||

Optmial weight of X in P | 60% | |||

Optmial weight of Y in P | 40% | |||

expected return of X | 14% | |||

expected return of Y | 12% | |||

Expected return of Risky portfolio = (Weight of X * Exp. Return) + (weight of Y * exp. Return) | ||||

(0.60*14)+(0.40*12) | ||||

13.200% | ||||

Expected return of complete portfolio = | 8% | |||

Assume weight of P = x, weight of risk free = 1-x | ||||

8 = (x * 13.2) + (1-x)*4) | ||||

8 =13.2x + 4 - 4x | ||||

4 = 9.2x | ||||

x = | 0.434782609 | |||

Amount to be invested in Risky portfolio = 2300*0.4348 = | $1000 | |||

Amount invested in x = 1000*60% = |
$600 |
|||

Amount invested in y = 1000*40% = | $400 | |||

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