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You have the choice of investing in a risky asset that isexpected to pay 12%...

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? ______%

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Expert Solution

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%

jeff jeffy answered 2 years ago
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