Your complete portfolio is worth a total of $1000 and can be formed out of 2 assets: a risk free asset that has a rate of return of 5% and a risky portfolio with an expected return of 8%. If you want your complete portfolio to have an expected rate of return equal to 8%, you must: a) Invest $1000 in the risk free asset b) Invest $500 in the risk free asset c) Invest $1000 in the risky portfolio d) Invest more than $1000 in the risky portfolio.

Question

Mahoney

Business

9 November, 09:38

Your complete portfolio is worth a total of $1000 and can be formed out of 2 assets: a risk free asset that has a rate of return of 5% and a risky portfolio with an expected return of 8%. If you want your complete portfolio to have an expected rate of return equal to 8%, you must: a) Invest $1000 in the risk free asset b) Invest $500 in the risk free asset c) Invest $1000 in the risky portfolio d) Invest more than $1000 in the risky portfolio.

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Yasmin Hill · Answer 1

The answer is: C) Invest $1000 in the risky portfolio

Explanation:

If the risk free asset has a rate of return of only 5% and the investor wants to get a RoR of 8%, the only way he can do it is by investing all his funds in the risky portfolio. If he invests any amount on the risk free asset then his total RoR will fall below 8%.