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%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively.
A. 0%; 60%; 40%
B. 25%; 45%; 30%
C. 40%; 24%; 16%
D. 50%; 30%; 20%
Answer: C. 40%; 24%; 16%
E(rp) = .6(14) + .4(10) = 12.4%
.08 = wrp(.124) + (1 - wrp)(.05)
wrp ˜ 40%
wx in complete portfolio = .40(.60) = 24%
wy in complete portfolio = .40(.40) = 16%