Question
After losing way too much money on sports betting, you decide to put your remaining money towards one (or a combination) of three assets. The
After losing way too much money on sports betting, you decide to put your remaining money towards one (or a combination) of three assets. The first is a stock ETF (expected return = 15%, std. dev. = 32%), the second is a corporate bond fund (expected return = 9%, std. dev. = 23%), and the third is a Treasury bond fund with a guaranteed return of 5.5%. The correlation between the two risky assets is 0.15.
You find that the optimal portfolio has 64.66% invested in the stock ETF and 35.34% in the corporate bond fund.
You desire an expected return of 10%, and you want to achieve that return of 10% while taking on the lowest possible risk. Using a mean-variance framework, you successfully determine how much to put in each of the three assets (i.e., the two risky assets and the one risk-free asset). If you have $18,703 to invest, how much (in dollars) should you invest in the stock ETF component of this 3-asset portfolio?
Write your answer in dollars, rounded to the nearest cent. (Hint: You might find it helpful to draw out some of the key points on the M-V frontier and Capital Allocation Line (CAL)).
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