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Your optimal risky portfolio formed with the two stocks above (A and B) has an expected...

Your optimal risky portfolio formed with the two stocks above (A and B) has an expected return of 19% and a standard derivation of 32%. The risk-free rate is 4% and you have a risk-aversion parameter of 3.

What is the proportion of your investment in A, B and the risk-free asset, respectively, in your final portfolio?

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Answer #2

Using the following equation,

Weight in risky asset=

Where E(rp) = Expected Return on Risky Portfolio i.e. 19%

Rf = Risk free Rate i.e. 4%

A = Risk Aversion i.e. 3

SD = Standard Deviation i.e. 0.32

Weight in risky asset= = 48.8%

Weight in risk free asset = 100% - 48.8% = 51.2%

Investor should place 48.8% in risky asset and 51.2% in risk free asset

Since the expected return of portfolio A and B not given, assuming weight to be 50% in A and 50% in B.

Thus, complete portfolio should have 48.8/2 = 24.4% weight in A, 24.4% weight in B and 51.2% weight in risk free asset.

For more clarrification please comment

Thumbs Up please !. Thanks

answered by: anonymous
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