Hillary can invest her family savings in two assets: riskless treasury bills or

Question

Hillary can invest her family savings in two assets: riskless treasury bills or a risky vacation home real estate project on an Arkansas river. The expected return on treasury bills is 4 percent with a standard deviation of zero. The expected return on the real estate project is 30 percent with a standard deviation of 40 percent.

5) Refer to Scenario 5.10. If Hillary invests 30 percent of her savings in the real estate project and the remainder in treasury bills, the expected return on her portfolio is:
A) 4 percent.
B) 11.8 percent.
C) 17 percent.
D) 22.2 percent.
E) 30 percent.

Explanation / Answer

Expected return on savings = ? Return expected on real estate project = 30 % = 0.3 * Amount invested = 0.3 * 0.3 Savings = 0.09 * savings Expected return on treasury bills = 4% = 0.04 * Amount invested = 0.04* 0.7 * savings Expected return = 0.09 * savings + 0.04* 0.7 * savings = 0.118 * savings Expected return = 11.8%

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