You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The risky portfolio, P, has a standard deviation of 0.7. Assuming you decide to hold a complete portfolio that has an expected return of 8%.
a) What is the expected return of your risky portfolio?
b) What is the weight you invested in Treasury Bills? What is the weight you invested in risky portfolio? (Hint: rc= wp*rp + wf*rf; and wf= 1-wp)