Suppose that you have a risky asset that provides you with an
expected return of 12% per year with 20% volatility (standard
deviation). Consider a risk-free asset that provides you with a 3%
risk-free return. (a) If you have $100,000 and invest 80% into the risky asset and
20% into the risk-free asset, what is the expected return and risk
of your portfolio? (b) How much will your portfolio be worth if the realized return
on the risky asset is 15%? (c) If you cannot borrow money, what is the maximum possible
ex-pected return on your portfolio, and what is the minimum? (d) If you are allowed to borrow money at the risk-free rate,
how can you get a portfolio with an 18% expected return and what is
the risk of this portfolio?
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This question was answered on: Sep 05, 2019
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