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
Problem 1PS
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Question
What is the expected return of a portfolio composed of 70% of the optimal risky portfolio and 30% of the risk-free asset?

Transcribed Image Text:Intro
Assume that there are only two stocks in the economy, stock A and stock B. The
risk-free asset has a return of 3%. The optimal risky portfolio, i.e., the portfolio with
the highest Sharpe ratio, is given below:
A
1
2 Expected return
3 Variance
4 Standard deviation
5 Covariance
6
O)
7
Optimal risky
portfolio
8 Weights
9 Expected return
10 Variance
11 Standard deviation
12 Sharpe ratio
B
Stock A
0.062
0.1089
0.33
0.02178
0.1062
0.0754
0.04403
0.2098
0.2164
с
Stock B Risk-free asset
0.077 0.03
0.0484
0.22
0.894 =1-B8
=B8*B2+C8*C2
D
=B8^2*B3+C8^2*C3+2*B8*C8*B5
=B10^0.5
=(B9-D2)/B11
Expert Solution
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Step 1
Expected return is the amount of money that an investor can expect to either gain or lose with regards to an investment made in a portfolio.
It is the anticipated profit or loss.
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