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Assume that you are going to invest $140,000 in a two asset portfolio. You will invest...

Assume that you are going to invest $140,000 in a two asset portfolio. You will invest $100,000 in the fully diversified market portfolio and the remainder of your funds will be invested in the riskless security. Assume the market risk premium is 8% and the riskless return is 4%. Compute the expected return on this portfolio.

Respond in percentage form without the percent sign and round to the second decimal place.

Solutions

Expert Solution

Expected Return on market portfolio = Market Risk Premium + Riskless return

                                                    = 8% + 4%

                                                    = 12%

Expected return of portfolio = Weight of Market Portfolio * Return on Market portfolio + Weight of Riskfree asset * Return on Riskfree asset

                                       = [ 100000 / 140000 ] * 12% + [ 40000 / 140000 ] * 4%

   = 0.7143 * 12% + 0.2857 * 4%

   = 9.71% Answer

Hope you understand the solution.

jeff jeffy answered 1 year ago
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