You invest $10 000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bond with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%?
A)$6 000
B)$4 000
C)$7 000
D)$3 000

Question

Quizplus · Accepted Answer

To achieve an expected return of 11%, we use the formula: Expected return = (Weight of risky asset * Return of risky asset) + (Weight of risk-free asset * Return of risk-free asset). Let x be the amount invested in the risky asset. Then, (x/10,000 * 15%) + ((10,000-x)/10,000 * 5%) = 11%. Solving for x gives x = $6,000.

You Invest $10 000 in a Complete Portfolio