You invest $1000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bond with a rate of return of 6%. A portfolio that has an expected value in one year of $1100 could be formed if you place ________ of your money in the risky portfolio and the rest in the risk-free asset.
A)40%
B)55%
C)60%
D)75%

Question

Quizplus · Accepted Answer

The correct answer is A because 40% of $1000 is $400. If you invest $400 in the risky portfolio with an expected rate of return of 16%, you can expect to earn $64 in one year. The remaining $600 invested in the Treasury bond with a rate of return of 6% will earn you $36 in one year. Therefore, the total expected value of the portfolio in one year is $400 + $64 + $36 = $500.

You Invest $1000 in a Complete Portfolio