Question
20. You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with 2 risky securities, X and Y.
20. You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with 2 risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of 0.14 and variance of 0.01; and Y has an expected rate of return of 0.10 and a variance of 0.0081. If you want to form a portfolio with an expected rate of return of 0.11, what percentages of your money must you invest in the T-bill and P, respectively?
A. 0.25; 0.75
B. 0.19; 0.81
C. 0.65; 0.35
D. 0.50; 0.50
E. cannot be determined
Answer: B E(rp) = 0.6(14%) + 0.4(10%) = 12.4%
11% = 5x + 12.4(1 - x)
x = 0.189 (T-bills)
(1-x) = 0.811 (risky asset)
The answer is B, and that is the solution, but I don't know why? can you please explain thoroughly, thank you
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