Question
An retiree has decided to create a portfolio that contains the Vanguard S&P 500 Index fund, an aggressive growth mutual fund, and government Treasury bills.
An retiree has decided to create a portfolio that contains the Vanguard S&P 500 Index fund, an aggressive growth mutual fund, and government Treasury bills. The S&P 500 Index fund is identical in risk to the market portfolio, while the aggressive growth mutual fund has a beta of 1.50. The retiree has decided on the following plan:
ASSET: | Dollars Invested: |
Treasury Bills | $200,000 |
Vanguard S&P 500 | $150,000 |
Aggressive Growth Fund | $450,000 |
Currently, investors are earning a 2% return on the Treasury bills. The retiree is not sure about the expected return on the Vanguard fund, but he does know that the market portfolio risk premium is 6.00%. What is the expected value of this portfolio in one year if we use the required return?
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