Consider the following information about a risky portfolio that you manage and a risk-free asset: E (rP) = 16%, σP = 26%, rf = 4%. a. Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 6%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset? (Do not round intermediate calculations. Round your answer to 2 decimal place.)

Question

Francesca Chang

Business

13 April, 22:20

Consider the following information about a risky portfolio that you manage and a risk-free asset: E (rP) = 16%, σP = 26%, rf = 4%. a. Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 6%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset? (Do not round intermediate calculations. Round your answer to 2 decimal place.)

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Lyons · Answer 1

What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset?

W1: Risky Porfolio = 17%

W2: Risk Free Asset = 83%

E (Rp) : Rate of Return: 6%

E (Rp) = W1 * R1 + W2*R2

E (Rp) = 17%*16% + 83%*4% = 6%

Explanation:

To find the proportion of investment on each assets it''s necessary to applied the following equation:

E (Rp) = W1 * R1 + W2*R2

To find W2 we define it as (1-w1) and then then the equation it's solved.

Where:

E (Rp) = Expected Return

W1 : Proportion of Risky Portfolio

R1 : Expected return of Risky Portfolio

W2: Proportion of Risk Free Asset

R2 : Expected return of Risk Free Asset