Question

15% Hulu) You currently have $125,000 invested in a portfolio that has an expected retum of 10% and a volatility of 10%. Suppose the risk troe rote la 5%, and there is another portfolio has an expected retum et 23% and a volatlly on a. What portfolio has a higher expected retum than your portfolio but with the same volatility b. What portfolio has a lower oily than your portfolio but with the same expected retum? 2. What portfolio has a higher expected retum than your portfolio but win the same voy Round all intermediate values to five decimal places as needed) The portfolio should be composed of 8 in the other pontolo, and the remaining in the risk free investment. (Round to the nearest dollar)

Answer 1

@ Volatility of required porttalio = Voletility of porttalio in which we have already invested = 10% Hence, s.D of required portfolio = SAD of other portale x weight of other poottolio because so of risk free asset 3 7 10 = 75 x weight of Lot Hence, weight of other portatio = to or 2 Weight of risk free = 1 - 2 = 1 3 Now, Expected return on this = poottolio. 2 x 23 + + 2 x 5 this foittelio T = 17 % which is greater than o n ni expected return on Current poolfalio . Amount invested be in other poothalie = 12 5000 x 2 2 - 83333 Amount to be invested in risk frue = 125000 - 8333} B = 41667

(6) Expected return of required portfolio w XX Elle + Wirktas (Wp) x E(R) 10 = w x 93+ (1-Wo ) x5 10 = 23 w ts-5W s = 18 We Now, S.D of other portfolio = S D x w - - 15 X 5 = 4.17 which - is lower than volatility of Current porttale Amount to be invested in other porttalio 195006 = 34722 Amount to be invested in 18 risk free - 90278