Question

You invest $98 in a risky asset and the T-Bill. The risky asset has an expected rate of return of 21% and a standard deviation of 0.28, and the T-Bill has a rate of return of 6%. A portfolio that has an expected outcome of $113 is formed by investing what dollar amount in the risky asset?

Answer 1

Expected Return =

. = (113 - 98) / 98 = 15.31%

Let the Weight of Risky asset is X

Then Weight of Risk Free asset will be 1-X

Expected Return = Return of Risky Asset * Weright of Risky Asset + Return of Risk Free Asset* Weight of Risk Free Asset

15.31%      = 21% * X + 6% (1-X)

15.31%      = 21% * X + 6% - 6% * X

15.31%      = 15% * X + 6%

X = (15.31% - 6%) / 15%

X = 62.07%

Dollar Amount in Risky Asset = 62.07% * 98 = $ 60.83