In: Finance
You have the choice of investing in a risky asset that is expected to pay 12% with a standard deviation of 22% and a T-bill paying 3%. If your goal is to construct a portfolio with an expected return of 10%, what portion of your portfolio should you invest in the risky asset? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Weight in Risky Asset? ______%
Portfolio Return:
Portfolio ret is weighted avg return of Individual securities in
portfolio.
Let X be the weight of investment in Risky Asset.
Stock | Weight | Ret | WTd Ret |
Risky portfolio | X | 0.1200 | 0.12X |
Risk Free Asset | 1-X | 0.0300 | 0.03-0.03X |
Portfolio Ret Return | 0.03+0.09X |
Given 0.03 + 0.09X = 0.10
0.09X = 010 - 0.03
= 0.07
X = 0.07 / 0.09
= 0.7778 I.e 77.78%