Question

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.03. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.08?

Answer 1

62.5% and 37.5%.

Explanation:

The computation of percentage is shown below:-

Let us assume the X be the weight in Risky Asset

And, 1 - X is the weight in Risk Free asset.

SO,

Particulars Rate Weight Weighted rate

Stock 11.00% X 0.11X

Risk free assets 3% 1 - X 0.03 - 0.03X

So, the equation will be

0.03 + 0.08 X = 0.08

0.08 X = 0.08 - 0.03

0.08 X = 0.05

X = 0.05 ÷ 0.08

= 0.625