Scenario 5.10:
Hillary can invest her family savings in two assets: riskless Treasury bills or a risky vacation home real estate project on an Arkansas river. The expected return on Treasury bills is 4 percent with a standard deviation of zero. The expected return on the real estate project is 30 percent with a standard deviation of 40 percent.
-Refer to Scenario 5.10. If Hillary invests 30 percent of her savings in the real estate project and the remainder in Treasury bills, the expected return on her portfolio is:
A) 4 percent.
B) 11.8 percent.
C) 17 percent.
D) 22.2 percent.
E) 30 percent.

Question

Quizplus · Accepted Answer

To calculate the expected return on the portfolio, we need to calculate the weighted average of the expected returns on each asset based on the percentage of savings invested in each:

Expected return on portfolio = (0.7 x 4%) + (0.3 x 30%) = 2.8% + 9% = 11.8%

Therefore, the best choice for Hillary is to invest 30 percent of her savings in the real estate project and the remainder in Treasury bills, as it gives her an expected return of 11.8 percent.

Scenario 5.10: Hillary Can Invest Her Family Savings in Two Assets: Riskless