You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P,...

You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with two risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of 0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a variance of 0.0081.

If you want to form a portfolio with an expected rate of return of 0.11, what percentages of your money must you invest in the T-bill and P, respectively?

How would I complete this on a scientific calculator?

Solutions

Expert Solution

Expected Return = Wa*Ra + Wp*Rp

Rp = Wx*Rx + Wy*Ry

Wa + Wp = 1

Rp = 0.60*14 + 0.40*10 = 12.4

11 = Wa*5 + (1-Wa)*12.4

11 = 5Wa + 12.4 - 12.4Wa

7.4Wa = 1.4

Wa = 1.4/7.4 = 0.1892

Wp = 0.8108

Money invest in T bill = 189.20

Money invested in P = 810.80

Kindly do inform me in case you have any queries.

jeff jeffy answered 2 years ago

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