Suppose that you have $1 million and the following two opportunities from which to construct a portfolio: Risk-free asset earning 14% per year. Risky asset with expected return of 29% per year and standard deviation of 37%. If you construct a portfolio with a standard deviation of 28%, what is its expected rate of return? (Do not round your intermediate calculations. Round your answer to 1 decimal place.)

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Business

Barbara Reid

17 April, 23:27

Suppose that you have $1 million and the following two opportunities from which to construct a portfolio: Risk-free asset earning 14% per year. Risky asset with expected return of 29% per year and standard deviation of 37%. If you construct a portfolio with a standard deviation of 28%, what is its expected rate of return? (Do not round your intermediate calculations. Round your answer to 1 decimal place.)

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Aileen · Answer 1

25.4%

Explanation:

Portfolio standard deviation = Proportion in the risky asset X Standard deviation of risky asset

28 = 37x

Solving for x derives:-

28/37 = x

Expected return of the portfolio = 14% (1 - (28/37)) + 29% (28/37)

= 25.4%

Therefore, the expected return on the portfolio is 25.4%.