Ask Question
12 September, 17:46

You invest $10000 in a risk asset with an expected rate of return of 0.124 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.04. If you have a risk-aversion parameter of 2.5, what is the expected return of your complete portfolio

+4
Answers (1)
  1. 12 September, 18:00
    0
    Expected return is 11.06%.

    Step-by-step explanation:

    Capital allocation between Optimal risky portfolio and risk free assets can be computed with following equation.

    y = E (rp) - rf / A*θp^2

    where,

    E (rp) = Expected return of Portfolio

    y = weight of risky portfolio

    (1-y) = weight of risk free assets

    rf = risk free rate

    A = Coefficient of Risk Aversion

    Фp = Standard deviation of risky portfolio

    Putting the values,

    y = {0.124-0.04}/{2.5*0.20^2}

    by solving,

    y = 0.84

    Weight of risk free assets in complete portfolio = (1-y) = 1-0.84 = 0.16

    Thus,

    Expected return of complete portfolio:

    E (r_c) = 0.124*0.84+0.04*0.16

    E (r_c) = 11.06%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “You invest $10000 in a risk asset with an expected rate of return of 0.124 and a standard deviation of 0.20 and a T-bill with a rate of ...” in 📗 Mathematics if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers