2. Please help and explain Portfolio Theory with a Riskless Asset2. Suppose that a fund that tracks the S&P has mean E(Rm) = 16% and standarddeviation σM = 10%, and suppose that the T-bill rate Rf = 8%. Answer the followingquestions about efficient portfolios:1(a) What is the expected return and standard deviation of a portfolio that is totallyinvested in the risk-free asset?(b) What is the expected return and standard deviation of a portfolio that has 50%of its wealth in the risk-free asset and 50% in the S&P?(c) What is the expected return and standard deviation of a portfolio that has 125%of its wealth in the S&P, financed by borrowing 25% of its wealth at the risk-freerate?(d) What are the weights for investing in the risk-free asset and the S&P that producea standard deviation for the entire portfolio that is twice the standard deviationof the S&P? What is the expected return on that portfolio?

C) ER will be8% + 1.25(16%-8%) = 18%*beta = -25%(0) + 125%(1) = 1.25SD will be125% x 10% = 12.5% D)…

Answered: Portfolio Theory with a Riskless Asset…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 13QTD

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