$\text { Investment }$ $ \quad $$ \quad $$ \quad $$ \quad $$\text { A }$ $ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$\text { B }$
$\begin{array}{|l|l|l|l|l|}
\hline\
\begin{array}{l}
\text { State } \
\text { description }
\end{array} & \text { Bad state } & \text { Good state } & \text { Bad state } & \text { Good state } \
\hline \text { Probability } & 0.5 & 0.5 & 0.5 & 0.5 \
\hline \text { Payoff } & 200 & 220 & 400 & 435 \
\hline
\end{array}$
-The share market is currently returning 18% p.a. ,while the risk-free asset return is 6%.If an investor wishes to earn a return of 22%,what weight should the investor hold in the risk-free asset?

Question

$\text { Investment }$  $  \quad $$  \quad $$  \quad $$  \quad $$\text { A }$   $  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$\text { B }$
$\begin{array}{|l|l|l|l|l|}
\hline\
\begin{array}{l}
\text { State } \
\text { description }
\end{array} & \text { Bad state } & \text { Good state } & \text { Bad state } & \text { Good state } \
\hline \text { Probability } & 0.5 & 0.5 & 0.5 & 0.5 \
\hline \text { Payoff } & 200 & 220 & 400 & 435 \
\hline
\end{array}$
-The share market is currently returning 18% p.a. ,while the risk-free asset return is 6%.If an investor wishes to earn a return of 22%,what weight should the investor hold in the risk-free asset?

Quizplus · Accepted Answer

The proportion borrowed at the risk-free rate can be obtained by solving: w_rf F1F1F1S1F1F1F10 E(R_rf)+ (1 - w_rf)F1F1F1S1F1F1F10 E(R_mkt)= 0.10%.Substituting the market and risk-free returns of 18% and 6% respectively yields w_rf0.06 + (1 - w_rf)0.18 = 0.22%,which can be solved to obtain a risk-free rate of w_rf= -1/3 or -33.3% (approximately).

Investment \text { Investment } Investment \quad \quad

$\text { Investment }$ $\quad$ $\quad$