The portfolio weight on the SPDRs is _______ round to 4 decimals having trouble

Question

The portfolio weight on the SPDRs is _______ round to 4 decimals

having trouble with this question

You want to build a two asset portfolio including SPDRs and T-Bills that has an expected return of 3.36%. A SPDR is a Standard and Poor s Depositary Receipt. A SPDR is an exchange traded fund (ETF) that is designed to generate the same return as the S&P; 500 index. What is the portfolio weight on the SPDRs? Assume that the return on the T-Bills is 3.0% and the expected return on the S&P; 500 is 9.0%.

Explanation / Answer

Assume total weight of portfolio be 1. and weight of T-bills be X Hence Weight of SPDR = 1-X Asset Return Weight SPDR 0.09 1-X T-bills 0.03 X Expeted return of portfolio = 3.36% i.e.0.0336 To put above values in a formula 0.0336 = [0.09*(1-X)] + [0.03*X] 0.0336 = 0.09-0.09X + 0.03X 0.0336 = 0.09 - 0.06X -0.0564 = - 0.06X X = 0.94 1-X = 1-0.94 =0.06 Weight of SPDR in a Portfolio = 6%

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