Question A:
|
|
|
| |
A |
B |
| Expected return |
18% |
12% |
| Standard deviation |
0.22 |
0.1 |
| Correlation coefficient |
0.2 |
| Covariance |
0.0044 |
| Wa |
11.29% |
|
| Wb |
|
88.71% |
| Rp |
12.68% |
Question: B risk-averse investor is not happy with the risk of the portfolio that you have calculated. He would therefore like to reduce the risk of the portfolio by investing in a risk free government bond that is offering annual return of 5%.
However he is quite happy with slightly lower returns from this investment. You have to advise how much investor should invest in the portfolio (comprising of security A and security B) and the Risk free asset so that the combination of risky portfolio and risk free asset provides 10% return. How much is the risk of this new portfolio?