Question

Suppose you are given the following data.

Asset Expected Return Standard Deviation
A 7% 30%
B 5% 20%
Risk-free 1%
Assets A and B are the only risky assets in the economy. The correlation between assets A and B is 0.25. Suppose that there is a portfolio P (consisting of Assets A and B) which has an expected return of 5.8%. What is the weight of Asset A in the portfolio P?
a. 18.97%
b. 27.61%
c. 12.32%
d. 14.65%

Answer 1

The weight of Asset A in the portfolio P is 18.97%. The right answer is a

Step-by-step explanation:

In order to calculate the weight of asset A in the portfolio P, we would have to calculate first the weight of stock A and B as follows:

Let weight of Asset A is w,

0.058 = w(0.07) + (1 - w)(0.05)

0.058 = 0.07w + 0.05 - 0.05w

w = 40%

Weight of Stock A = 40%

Weight of Stock B = 60%

Therefore Standard Deviation = [(0.40)2(0.30)2 + (0.60)2(0.20)2 + 2(0.40)(0.60)(0.30)(0.20)(0.25)]1/2

Standard Deviation = 18.97%

The weight of Asset A in the portfolio P is 18.97%