You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with two risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of 0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a variance of 0.0081. If you want to form a portfolio with an expected rate of return of 0.11, what percentages of your money must you invest in the T-bill and P, respectively?
A) 0.25; 0.75
B) 0.19; 0.81
C) 0.65; 0.35
D) 0.50; 0.50
E) Cannot be determined.

Question

Quizplus · Accepted Answer

To achieve an expected return of 0.11, solve the equation: 0.05*(1-w) + 0.12*w = 0.11, where w is the weight in the risky portfolio P. Solving gives w = 0.81 for P and 0.19 for the T-bill.

You Are Considering Investing $1,000 in a T-Bill That Pays