There are two stocks: A and B, and Treasury Bill (TB). The parameters of these s

ID: 2644003 • Letter: T

Question

There are two stocks: A and B, and Treasury Bill (TB). The parameters of these securities are following:

Expected Return: A: 10%, B: 15%, TB: 50%

Standard Deviation: A: 20%, B: 25%, C: 0%

Correlation: A: 1, B: 0.2, TB: 0

1. What is the expected return and standard deviation of a portfolio, which invest 25% in A, 25% in B, and 50% in TB?

2. If you have a risk aversion of 2, what is your optimal portfolio composition? What is your portfolio expected return and standard deviation?

Can someone show detailed solution? Thank You!

Hello Pal,

First of all a very nice as well as intersting question from your side.

So now straight to the question, as asked above with all the information available from your side and from mine, the answer is as under:

After calculation of the above given information, we can conclude that the answer will be as under:

Q.1

- expected return: 12.5%

- standard deviation: 18.43%

Q.2

- optimal portfolio: 20 : 35 : 45.

That is all I can say from the above given information by you, hope have solved your problem to some extent.

Regards.

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