You are considering investing $2,000 in a complete portfolio. The complete portf

Question

You are considering investing $2,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 4% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 16%, and Y has an expected rate of return of 11%. To form a complete portfolio with an expected rate of return of 7%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively.

30%; 18%; 12%

0%; 60%; 40%

27%; 44%; 29%

50%; 30%; 20%

*please explain how to do so*

Explanation / Answer

Risky portfolio = .6(16%) + .4(11%) = 14%

7% = Weight1(4%) + (1- Weight1)(14%)

Weight1 = 30%

7% = .3(4%) + .7(14%)

Answer: 30%, 18%, 12%

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