Question

urgent, thanks

Benjamin Green manages a risky portfolio with an expected rate of return of 16% and a standard deviation of 25%. The T-bill rate is 3%. Suppose his client decides to invest in his risky portfolio a proportion (y) of his total investment budget so that his overall portfolio will have a standard deviation of 12%. The proportion (y) is closest to: Select one: O A. 0.48. OB. 0.75. O C. 2.08.

Answer 1

Ans1: we will use the formula for portfolio variance for to assets.

Since one of the asset is risk free asset. Its variance is zero

We have to find the weight of risky asset in the portfolio for which we will use:

Standard deviation of portfolio= weight of risky asset × standard deviation of the risky asset.

0.12=weight of risky asset× 0.25

0.12/0.25= 0.48

Which means if we invest 48% in risky asset and the remaining in the risk-free asset the standard deviation of the portfolio will be 12%.

Ans2:

answer to we have to find the expected return of the portfolio of two assets in which one of the assertive risk-free asset.

Let's assume that w1 is the weight of risk free asset

W2 is the weight of risky asset.

W1 + w2 =100%

W1=w2-100%

Expected return of the portfolio= weight of asset 1×return on asset 1+ weight of asset 2×return on asset 2

12%=(100%-w1)*2% + 15%*w2

=>2%-2%w1 +15%w2

12-2= 13w2

10/13= w2

76.92%