Question

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed

of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and

Y. The optimal weights of X and Y in P are 40% and 60%, respectively. X has an expected rate of

return of 0.12 and variance of 0.0081, and Y has an expected rate of return of 0.09 and a variance

of 0.0016. The coefficient of correlation, rho, between X and Y is 0.45. If you decide to hold a

complete portfolio that has an expected outcome of $1,180

a. What will be the dollar values of your positions in X, Y, and Treasury bills,

respectively? (10%)

b. What is the risk for the risky portfolio P (10%)?

c. What is the SR for the risky portfolio P (5%)?

d. What is the risk for this complete portfolio C (5%)?

(Hint: risk in complete portfolio C is the product of y (the weight in P) and the risk of P.

e. What is the SR for this complete portfolio C (5%)?

Answer 1

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