Question

My complete portfolio includes a risk-free asset and a risky portfolio. The risk premium of my complete portfolio is 5%. If I want to triple the amount of risk premium, I must_____________ triple the amount invested in the risk free asset decrease the amount invested in the risky portfolio do nothing triple the amount invested in the risky portfolio

Answer 1

Answer: Triple the amount invested in the risky portfolio

Step-by-step explanation:

The Risk-free rate by definition has no risk (or very little risk) so if the amount invested in this asset is tripled, the risk will not triple.

Decreasing the amount invested in the risky portfolio will decrease the risk of the complete portfolio because you have divested from asset giving your portfolio risk.

Doing nothing will neither increase nor decrease your portfolio's risk.

Best option therefore is to triple the amount invested in the risky portfolio because by investing three times more in a risky portfolio, you are now 3 times at risk.