Given that the risk-free rate is 5%, the expected return on the market portfolio
ID: 2651404 • Letter: G
Question
Given that the risk-free rate is 5%, the expected return on the market portfolio is 20%, and the standard deviation of returns to the market portfolio is 20%, answer the following questions:
a. You have $100,000 to invest. How should you allocate your wealth between the risk free asset and the market portfolio in order to have a 15% expected return?
b.What is the standard deviation of your portfolio in (a)?
c.Suppose that the market pays either 40% or 0% each with probability one half. You alter your portfolio to a more risky level by borrowing $50,000 at the risk free rate and investing it and your own $100,000 in the market portfolio. Give the probability distribution of your wealth (in dollars) next period.
Explanation / Answer
Answer: a. Expected Return=Rf+beta(ER(m)-Rf)
15%=5%+beta(20%-5%)
10%=15%beta
Beta=0.667
Answer:b =1.5(0.20)=0.30
Answer:c
Probability Wealth 1/2 150000*1.4-50000*1.1=$155,000 1/2 150000*1-50000*1.1=$95000Related Questions
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