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21 June, 04:02

Suppose that you have $1 million and the following two opportunities from which to construct a portfolio: Risk-free asset earning 14% per year. Risky asset with expected return of 29% per year and standard deviation of 37%. If you construct a portfolio with a standard deviation of 28%, what is its expected rate of return? (Do not round your intermediate calculations. Round your answer to 1 decimal place.)

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  1. 21 June, 05:33
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    25.4%

    Explanation:

    Portfolio standard deviation = Proportion in the risky asset X Standard deviation of risky asset

    28 = 37x

    Solving for x derives:-

    28/37 = x

    Expected return of the portfolio = 14% (1 - (28/37)) + 29% (28/37)

    = 25.4%

    Therefore, the expected return on the portfolio is 25.4%.
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