You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045. 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 0.13?

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Quizplus · Accepted Answer

To achieve an expected portfolio return of 0.13, you need to invest more than 100% in the risky asset and borrow at the risk-free rate. The weights can be calculated using the formula: 0.13 = w(0.11) + (1-w)(0.045). Solving for w gives 130.77% in the risky asset and -30.77% in the risk-free asset.

You Invest $100 in a Risky Asset with an Expected