Homework Answers
The Weight of the market (risky asset) in the Optimal portfolio is given by
W = (E(r) -Rf)/(A*variance)
Where E(r) is the expected return of the market
Rf is the risk free rate and variance is the square of the standard deviation of the market returns
so, W = (0.05 -0.02) / (5* 0.1^2)
=0.03/0.05 = 0.6
So, weight of the risk free asset = 1-W = 0.4
So the weight of the risk free asset Wf = 0.4 or 40% in the Optimal portfolio
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Please use the following formulas to answer the question:
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