You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be ________, ________, and ________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%.
A) $162; $595; $243
B) $243; $162; $595
C) $595; $162; $243
D) $595; $243; $162

Question

Quizplus · Accepted Answer

.08(1,000) = F(.05) + (1,000 − F)[.6(.14) + .4(.10)]
F = 595
X = (1,000 − 595)(.6) = 243
Y = (1,000 − 595)(.4) = 162

You Are Considering Investing $1,000 in a Complete Portfolio