Problem 7-16 Suppose that you have $1 million and the following two opportunities from which to...
Problem 7-16
Suppose that you have $1 million and the following two opportunities from which to construct a portfolio:
-
Risk-free asset earning 11% per year.
-
Risky asset with expected return of 26% per year and standard deviation of 34%.
If you construct a portfolio with a standard deviation of 24%, what is its expected rate of return? (Do not round your intermediate calculations. Round your answer to 1 decimal place.)
Homework Answers
Portfolio standard deviation=weight of risky asset*standard deviation of risky asset
Hence,
24%=weight of risky asset*34%
=>weight of risky asset=24%/34%
Portfolio expected
return=24%/34%*26%+(1-24%/34%)*11%=21.5882%
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Problem 7-16
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