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1 June, 22:31

Suppose that you have $1 million and the following two opportunities from which to construct a portfolio: Risk-free asset earning 11% per year. Risky asset with expected return of 35% per year and standard deviation of 42%. If you construct a portfolio with a standard deviation of 30%, what is its expected rate of return

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  1. 1 June, 23:28
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    The expected rate of return is 28.1408%

    Explanation:

    In order to calculate the expected rate of return we would have to use the following formula:

    expected rate of return=w1r1+w2r2

    σp=w1σ1

    30%=w1*42%

    w1=30%/42%

    w1=71.42%

    w2=1-w2

    w2=1-71.42%

    w2=28,58%

    expected rate of return = (71,42%*35%) + (28,58%*11%)

    expected rate of return=0.24997+0.031438

    expected rate of return=0.281408

    The expected rate of return is 28.1408%
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