Question

Consider the following information about a risky portfolio that you manage and a risk-free asset: E(rP) = 16%, σP = 26%, rf = 4%. a. Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 6%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset? (Do not round intermediate calculations. Round your answer to 2 decimal place.)

Answer 1

What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset?

W1: Risky Porfolio = 17%

W2: Risk Free Asset = 83%

E(Rp): Rate of Return: 6%

E(Rp) = W1 *R1 + W2*R2

E(Rp) = 17%*16% + 83%*4% = 6%

Step-by-step explanation:

To find the proportion of investment on each assets it''s necessary to applied the following equation:

E(Rp) = W1 *R1 + W2*R2

To find W2 we define it as (1-w1) and then then the equation it's solved.

Where :

E(Rp) = Expected Return

W1 : Proportion of Risky Portfolio

R1 : Expected return of Risky Portfolio

W2: Proportion of Risk Free Asset

R2 : Expected return of Risk Free Asset