Suppose that a fund that tracks the S&P 500 has mean E [Rm] = 16% and standard deviation σM = 10%, and suppose that the T-Bill rate is Rf = 8%. Answer the following questions about efficient portfolios: (a) What is the expected return and standard deviation of a portfolio that is totally invested 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 500?
Suppose that a fund that tracks the S&P 500 has mean E [Rm] = 16% and standard deviation σM = 10%, and suppose that the T-Bill rate is Rf = 8%. Answer the following questions about efficient portfolios:
(a) What is the expected return and standard deviation of a portfolio that is totally invested 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 500?
(c) What is the expected return and standard deviation of a portfolio that has 125% of its wealth in the S&P 500, financed by borrowing 25% of its wealth at the risk-free rate?
(d) What are the weights for investing in the risk-free asset and the S&P 500 that produce a standard deviation for the entire portfolio that is twice the standard deviation of the S&P 500? What is the expected return on that portfolio?
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