Question
You are considering investing in three different assets. The first is a stock, the second is a long-term government bond and the third is a
You are considering investing in three different assets. The first is a stock, the second is a long-term government bond and the third is a T-bill money market fund that yields a sure rate of 5%. The probability distributions of both the risky assets:
| Expected Return | Standard Deviation |
Stock (S) | 10% | 30% |
Bond (B) | 9 | 21 |
The correlation between the stock and bond returns is 0.20.
The risky portfolio is formed by allocating 60% of your wealth to a risky portfolio (formed by investing equally in the stock and the bond), and 40% of your wealth to the T-bill money market fund.
If as the investor you want an expected return of 15% from a complete portfolio C formed by using the risky portfolio and the risk-free asset, what proportions of the stock, the bond, and risk-free asset should you be holding in the complete portfolio?
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