1. Consider the following securities: Risky security: E(R) = 20% and \sigma = 20%. Risk-free security: Rf = 15%, which is also the borrowing rate. You want to construct a portfolio combining the risky security and the risk-free security to get an expected return of 25 % . (a) What weights would you need to put in the risky and the risk - free securities to earn an expected return of 25% ? (b) What is the standard deviation of this portfolio? (c) What is the reward-to- variability ratio? (d) Draw the capital allocation line (CAL). Label the points and the axes clearly.
1. Consider the following securities: Risky security: E(R) = 20% and \sigma = 20%. Risk-free security: Rf = 15%, which is also the borrowing rate. You want to construct a portfolio combining the risky security and the risk-free security to get an expected return of 25 % . (a) What weights would you need to put in the risky and the risk - free securities to earn an expected return of 25% ? (b) What is the standard deviation of this portfolio? (c) What is the reward-to- variability ratio? (d) Draw the capital allocation line (CAL). Label the points and the axes clearly.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:1. Consider the following securities: Risky security: E(R) = 20% and \sigma = 20%. Risk-free security: Rf = 15%,
which is also the borrowing rate. You want to construct a portfolio combining the risky security and the risk - free security
to get an expected return of 25% . (a) What weights would you need to put in the risky and the risk - free securities to
earn an expected return of 25% ? (b) What is the standard deviation of this portfolio? (c) What is the reward-to-
variability ratio? (d) Draw the capital allocation line (CAL). Label the points and the axes clearly.
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