Question

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and Y, respectively, would be ________ and ________. a. $300; $450 b. $150; $100 c. $450; $300 d. $100; $150

Answer 1

Investment in risky portfolio = 25% x $1,000 = $250

Dollar value of Investment in project X = 60% x $250 = $150

Dollar value of investment in project Y = 40% x $250 = $100

The correct answer is B

Step-by-step explanation:

Since 25% of the total fund is invested in risky portfolio ie 25% x $1,000 = $250 and the weights of X and Y are 60% and 40% respectively.

Thus, the dollar amount of investment in each stock will be calculated according to their respective weights. ie X = 60% x $250 and Y = 40% x $250.