You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be _________, __________, and __________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%.
Expected Return of X E(Rx) = 14%
Expected Return Y E(Ry) = 10%
Optimal weight of X (Wx) = 60%
Optimal weight of Y (Wy) = 40%
Thus, Expected return of Risky portfolio would be:
Risk free rate (Rf) = 5%
Expected Return of Complete portfolio (E(Rc) = 8%
Weight of Risk free assets in complete portfolio = Wf
Weight of Risk portfolio in complete portfolio = Wp = (1-Wf)
Thus,
by solving,
and
Thus,
Weight of X in Complete Portfolio = 0.60*0.4054 = 0.2432
Weight of Y in Complete Portfolio = 0.40*4054 = 0.1622
Weight of T-bills in Complete Portfolio = 0.5954
Total Investment in Complete portfolio = $1,000
Thus, In Complete Portfolio,
Please note: Intermediate calculations rounded off to 4 decimal place. please do comment if have other instructions
Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.
You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury...
You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be...
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