Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / A financial advisor is offering you a product with an expected return of 21% and a return standard deviation of 32%
A financial advisor is offering you a product with an expected return of 21% and a return standard deviation of 32%. The risk-free rate is 2.7%, the market return is 16.4%, and the market volatility is 25%. How much should you invest in the risk-free asset of an optimal portfolio to obtain the same expected return?
Select one:
a. 33.58%
b. -133.58%
c. 133.58%
d. -33.58%
Expected return offered by financial advisor = 21%
Risk free rate = 2.7%
Market return = 16.4%
Let the investment in Risk free asset be x
So, Invesment in market will be = 1-x
Since the Optimal portfolio must have same return as offered by the financial advisor so;
Expected return of optimal portfolio = 21%
Expected return of optimal portfolio = Risk free rate* Investment in Risk free asset + Market return * Invesment in market
Expected return of optimal portfolio = 2.7% * x + 16.4% (1 - x)
21% = 2.7% x + 16.4% - 16.4% x
21% - 16.4% = 2.7% x - 16.4% x
4.6% = -13.7% x
x = 4.6% / (-13.7%)
x = -0.3358
Therefore, Invesment in Risk free asset = -33.58%
Ans: Option d = -33.58%
