You invest $1,000 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 bill with a rate of return of 6%.
-A portfolio that has an expected value in one year of $1,100 could be formed if you _________.
A) Place 40% of your money in the risky portfolio and the rest in the risk free asset
B) Place 55% of your money in the risky portfolio and the rest in the risk free asset
C) Place 60% of your money in the risky portfolio and the rest in the risk free asset
D) Place 75% of your money in the risky portfolio and the rest in the risk free asset

Question

Quizplus · Accepted Answer

The expected return of a portfolio is the weighted average of the expected returns of the assets in the portfolio. In this case, the expected return of the portfolio is:E(Rp) = 0.40 * 0.16 + 0.60 * 0.06 = 0.104The standard deviation of a portfolio is the square root of the weighted average of the variances of the assets in the portfolio. In this case, the standard deviation of the portfolio is:σp = sqrt(0.40^2 * 0.20^2 + 0.60^2 * 0.00^2) = 0.08The expected value of a portfolio in one year is the expected return of the portfolio multiplied by the initial investment. In this case, the expected value of the portfolio in one year is:E(Vp) = E(Rp) * I = 0.104 * 1000 = 104Therefore, a portfolio that has an expected value in one year of $1,100 could be formed if you place 40% of your money in the risky portfolio and the rest in the risk free asset.

You Invest $1,000 in a Complete Portfolio