Question

You invest $2,600 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 12% and a standard deviation of 20% and a Treasury bill with a rate of return of 4%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 8%.

Answer 1

40% of your complete portfolio should be invested in the risky portfolio.

Step-by-step explanation:

This can be calculated using the following formula:

SDC = PR * SDR ......................... (1)

Where,

SDC = Standard deviation of complete portfolio = 8%

PR = Percentage to invest in the risky portfolio = ?

SDC = Standard deviation of the risky portfolio = 20%

Substituting the values into equation (1) and solve for PR, we have:

8% = PR * 20%

PR = 8% / 20%

PR = 40%

Therefore, 40% of your complete portfolio should be invested in the risky portfolio.