Question

Suppose that you have $1 million and the following two opportunities from which to construct a portfolio: Risk-free asset earning 11% per year. Risky asset with expected return of 35% per year and standard deviation of 42%. If you construct a portfolio with a standard deviation of 30%, what is its expected rate of return

Answer 1

The expected rate of return is 28.1408%

Step-by-step explanation:

In order to calculate the expected rate of return we would have to use the following formula:

expected rate of return=w1r1+w2r2

σp=w1σ1

30%=w1*42%

w1=30%/42%

w1=71.42%

w2=1-w2

w2=1-71.42%

w2=28,58%

expected rate of return=(71,42%*35%)+(28,58%*11%)

expected rate of return=0.24997+0.031438

expected rate of return=0.281408

The expected rate of return is 28.1408%