Homework Answers
Weight of risky asset in a complete optimal portfolio can be calculated using following formula:
y = ((E(rp) - rf)/(A*SD(p)^2)
So weight of risk free asset in such a portfolio = 1-y
Given to us,
E(rp) = 5%
SD(p) = 10%
rf = 2%
A = 5
So, y = (0.05 - 0.02)/(5*0.1^2) = 0.6 or 60%
So, weight of risk-free asset Wf = 1-0.6 = 0.4 or 40%
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