You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045.
a) How would you form a portfolio that has an expected outcome of $114?
b) What is the slope of slope of the Capital Allocation Line formed with the risky asset and the risk-free asset?

Question

08-03-2021
Business

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You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045.
a) How would you form a portfolio that has an expected outcome of $114?
b) What is the slope of slope of the Capital Allocation Line formed with the risky asset and the risk-free asset?

Sagot :

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abiolataiwo2015 abiolataiwo2015 · Answer 1 · 2021-03-09T04:58:22-05:00

Answer:

A. portfolio that has an expected outcome of $114 can be form by borrowing the amount of $46 at the risk-free rate and investing the total amount ($146) in the risky asset.

B. 0.3095

Explanation:

A. Calculation for How would you form a portfolio that has an expected outcome of $114

Portfolio expected outcome = $100: (114 - 100)/100 = 14%

Portfolio expected outcome =0.14 = w1(0.11) + (1 - w1)(0.045)

Portfolio expected outcome=0.14 = 0.11w1 + 0.045 - 0.045w1

Portfolio expected outcome=0.095 = 0.065w1

w1 = 1.46($100)

Portfolio expected outcome= $146

Portfolio expected outcome=(1 - w1)$100 = -$46.

Therefore based on the above calculation portfolio that has an expected outcome of $114 can be form by borrowing the amount of $46 at the risk-free rate and investing the total amount ($146) in the risky asset.

B. Calculation for the slope of slope of the Capital Allocation Line formed with the risky asset and the risk-free asset

Slope of the Capital Allocation Line=(0.11 - 0.045)/0.21

Slope of the Capital Allocation Line= 0.3095.

Therefore the slope of slope of the Capital Allocation Line formed with the risky asset and the risk-free asset is 0.3095

Sagot :

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