Question

12. An investor invests 40% of his wealth in a risky asset with an expected rate of return of 15% and a variance of 0.04 and
1 0
Add a comment Improve this question Transcribed image text
Answer #1

Weight of the risky asset in the portfolio = w1 = 40%, Expected return on the risky asset = R1 = 15%, Varaince of the risky-asset = σ12 = 0.04

Weight of the treasury bill in the portfolio = w2 = 60%, Return on treasury bill = R2 = 6%, Variance of the treasury bill = σ22 = 0 [Treasury bills are risk-free and therefore variance is zero]

Expected return of the portfolio is given by the formula:

Expected portfolio return = E[RP] = w1*R1 + w2*R2 = 40%*15% + 60%*6% = 9.6%

Varaince of the portfolio is calculated using the formula:

Portfolio variance = σP2 = w1212 = (40%)2*0.04 = 0.0064

Standard deviation is the square-root of the variance

Standard deviation of the portfolio = σP = (0.0064)1/2 = 0.08 = 8%

Expected return of the portfolio = 9.6%

Standard deviation of the portfolio = 8%

Answer -> 9.6%, 8% (Option 2)

Add a comment
Know the answer?
Add Answer to:
12. An investor invests 40% of his wealth in a risky asset with an expected rate...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT