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Assume there are initially only two stocks in which to invest, A and B. Further assume no shortsale restrictions and that short-sale proceeds can be used to invest. The structure of the market portfolio, and the expected return and standard deviation of market portfolio and both assets are given below.
Market Portfolio
Expected return rate =9.6%
σ=0.087
Weight of A in the portfolio =0.40
Weight of B in the portfolio =0.60

Asset A
Expected return rate =9.6%

Asset B
Expected return rate =10%, σ=0.11

The correlation coefficient between A and B is rhoAB =0.136. A client wants a portfolio with an expected return of 12%. She currently is achieving this by placing a weight of −2 in asset weight of 3 in asset B. The client's total wealth is 10,000 .
(a) What is the client's position in each asset in dollar amounts?
(b) Show that the client's portfolio achieves her objective.

Sagot :

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