An investor invests 65% of her wealth in a risky asset with an expected rate of return of 9.53% and a variance of 3.72%, and she puts 30% in a Treasury bill that pays 2.47%.

An investor invests 65% of her wealth in a risky asset with an expected rate of return of 9.53% and a variance of 3.72%, and she puts 30% in a Treasury bill that pays 2.47%. Her complete portfolio's expected rate of return and standard deviation are ________ and ________ respectively.

Expert Solution

Weight of the risky asset is 65%
Expected return is 9.53%
Variance is 3.72%
Standard deviation is square root of variance, that is equal to 0.192873015

Weight of the Treasury bill is 30%
Expected return is 2.47%
Variance and standard is 0 as Treasury bill is a risk free asset.

Expected rate of return of the portfolio=(Weight of the risky asset)*(Expected return of the risky asset) + (Weight of Treasury bill in the portfolio)*(Expected return of Treasury bill)
=(65%)*(9.53%) + (30%)*(2.47%)
=0.061945 + 0.00741
=0.069355 or 6.94% (Rounded to 2 decimal places)

Standard deviation of the portfolio=(Weight of the risky asset)*(Standard deviation of the risky asset)
=65%*0.192873015
=0.12536746 or 12.54% (Rounded to 2 decimal places)

Answer:
Expected rate of return of the portfolio is 6.94%
Standard deviation of the portfolio is 12.54%

jeff jeffy answered 2 years ago

Consider an investor with expected utility function who invests her initial wealth between a risky asset...

Consider an investor with expected utility function who invests her initial wealth between a risky asset with state-dependent rate of return r and a risk-free asset with rate of return r0. The investor is strictly risk averse. Suppose that E(r) < r0, that is, negative risk premium. Show - using either a diagram or calculus - that the optimal investment in the risky asset is to short sell the asset, that is, hold a portfolio with negative fraction of wealth...

Consider an investor with expected utility function who invests her initial wealth between a risky asset...

Consider an investor with expected utility function who invests her initial wealth between a risky asset with state-dependent rate of return r and a risk-free asset with rate of return r0. The investor is strictly risk averse. Suppose that E(r) < r0, that is, negative risk premium. Show - using either a diagram or calculus - that the optimal investment in the risky asset is to short sell the asset, that is, hold a portfolio with negative fraction of wealth...

The expected rate of return on a Treasury Bill is 0.020, the expected rate of return...

The expected rate of return on a Treasury Bill is 0.020, the expected rate of return on the Bud 5000 is 0.08 and the required rate of return of a stock is 0.10. What is the stocks beta?

13) Consider a Treasury bill with a rate of return of 5% and the following risky...

13) Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio...

The Treasury bill rate is 6%, and the expected return on the market portfolio is 12%....

The Treasury bill rate is 6%, and the expected return on the market portfolio is 12%. According to the capital asset pricing model: a. What is the risk premium on the market? b. What is the required return on an investment with a beta of 1.7? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) c. If an investment with a beta of 0.9 offers an expected return of 8.7%, does it have a positive or...

The Treasury bill rate is 6%, and the expected return on the market portfolio is 12%

Problem 12-27 CAPM (LO2) The Treasury bill rate is 6%, and the expected return on the market portfolio is 12%. According to the capital asset pricing model: a. What is the risk premium on the market? b. What is the required return on an investment with a beta of 1.7? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) c. If an investment with a beta of 0.9 offers an expected return of 8.7%, does it have...

The Treasury bill rate is 2%, and the expected return on the market portfolio is 12%....

The Treasury bill rate is 2%, and the expected return on the market portfolio is 12%. Using the Capital Asset Pricing Model (hereafter, CAPM) by William Sharpe (1964) with the given assumptions regarding the risk free rate and market rate to answer the following questions: A. Draw a graph showing how the expected return varies with beta. B. What is the risk premium on the market? C. What is the required return on an investment with a beta of 2.0?...

Suppose that the Treasury bill rate is 6% and the expected return on the market stays...

Suppose that the Treasury bill rate is 6% and the expected return on the market stays at 9%. Use the following information. Stock Beta (β) United States Steel 3.09 Amazon 1.39 Southwest Airlines 1.27 The Travelers Companies 1.18 Tesla 1.02 ExxonMobil 0.90 Johnson & Johnson 0.89 Coca-Cola 0.62 Consolidated Edison 0.19 Newmont 0.10 Calculate the expected return from Johnson & Johnson. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Find the highest...

You invest $100 in a risky asset with an expected rate of return of 0.13 and...

You invest $100 in a risky asset with an expected rate of return of 0.13 and a standard deviation of 0.11 and a T-bill with a rate of return of 0.03. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to

You invest $100 in a risky asset with an expected rate of return of 0.11 and...

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.03. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.08? Select one: a. 30% and 70% b. 50% and 50% c. 60% and 40% d. 40% and 60% e. Cannot be determined....

Question

An investor invests 65% of her wealth in a risky asset with an expected rate of return of 9.53% and a variance of 3.72%, and she puts 30% in a Treasury bill that pays 2.47%.

Solutions

Expert Solution

Related Solutions

Consider an investor with expected utility function who invests her initial wealth between a risky asset...

Consider an investor with expected utility function who invests her initial wealth between a risky asset...

The expected rate of return on a Treasury Bill is 0.020, the expected rate of return...

13) Consider a Treasury bill with a rate of return of 5% and the following risky...

The Treasury bill rate is 6%, and the expected return on the market portfolio is 12%....

The Treasury bill rate is 6%, and the expected return on the market portfolio is 12%

The Treasury bill rate is 2%, and the expected return on the market portfolio is 12%....

Suppose that the Treasury bill rate is 6% and the expected return on the market stays...

You invest $100 in a risky asset with an expected rate of return of 0.13 and...

You invest $100 in a risky asset with an expected rate of return of 0.11 and...