For questions 3 to 5, use the following information: You invest $1000 in a portf
ID: 2752980 • Letter: F
Question
For questions 3 to 5, use the following information:
You invest $1000 in a portfolio that is composed of a risky asset and a risk-free asset. The risky asset has an expected rate of return of 15% and a standard deviation of 20%. The risk-free asset has a rate of return of 5%.
3. __________ of your portfolio should be invested in the risk-free asset if you want your portfolio to have a standard deviation of 10%.
A) 100%
B) 67%
C) 50%
D) 20%
4. Your portfolio will have an expected return of 12% if you invest __________ in the risky asset, and the remaining in the risk-free asset.
A) $1000
B) $900
C) $700
D) $500
5. The slope of the capital allocation line formed with the risky asset and the risk-free asset is __________.
A) 1.4
B) 0.7
C) 0.5
D) 0.3
Please show work thanks!
Explanation / Answer
Answer:3 C) 50%
Wpstandard deviation of risky asset+Wrf Standard deviation of risk free=10%
=wp 0.20+0=0.10
wp=0.50
=50%
Answer:4 C) $700
wp*rp+Wf*rf=12%
wp*15%+(1-Wp)*5%=12%
15% wp+5%-5% wp=12%
10% wp=7%
wp=0.70
Risky asset invested=1000*0.70=700
Answer:5 C) 0.5
15%-5%/20%=10%/20%=0.50