Question
Suppose you are a portfolio manager and you plan to form a portfolio that consists of three components, including a risk-free money market security, a
Suppose you are a portfolio manager and you plan to form a portfolio that consists of three components, including a risk-free money market security, a stock, and a bond. The table below shows the expected return and standard deviation for each component. Further suppose that the correlation between the stock and bond returns is 0.21.
Component | Expected return | Standard deviation | Weight in a complete portfolio C that is on the best feasible CAL |
risk-free money market security (RF) | 7.2% | 0% | 50.4% |
Stock (ST) | 18.2% | 30.3% | 33.4% |
Bond (BD) | 9.2% | 20.3% | 16.2% |
For an alternative complete portfolio C* that is on the best feasible CAL, its expected return is 13.5%. Calculate the weights of the three components (i.e. RF, ST, and BD) in this alternative complete portfolio C*.
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