Question
Consider the following information regarding a portfolio consisting of two REITs: weight in REIT A = 60%; weight in REIT B = 40%; beta of
Consider the following information regarding a portfolio consisting of two REITs: weight in REIT A = 60%; weight in REIT B = 40%; beta of REIT A = 0.50; beta of REIT B = 1.50; standard deviation of REIT A returns = 5.00% per year; standard deviation of REIT B returns = 7.00% per year; the coefficient of correlation between REIT A and REIT B = -0.50; the expected return of the market portfolio = 8.00% per year; and the riskfree rate of return = 2.00% per year. Assuming you can borrow and lend at the riskfree rate, can you combine the riskfree asset and the above portfolio of REITs such that this new portfolio has an approximate expected return of 11.29% and a standard deviation equal to that of REIT A (the least risky of the two REITs). If you can, what percentage of this new portfolio's total funds should you invest in the riskfree asset (hint: this weight will be negative, implying you are borrowing in order to invest additional funds in the REIT portfolio)? (Answer in percentage points rounded to the nearest percentage point) |
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