Question

You live in an economy with the risk-free rate of 2% p.a. and the expected return on the market portfolio equal to 10% p.a. and volatility of 20% p.a. You are approached by a client whose target expected return equals 8% p.a. What is the weight of the market in the portfolio meeting that return target?

Select one: a. 0.50 b. 0.75 c. 0.25 d. 0.10

Answer 1

risk free rate rf = 2%

expected return on market rm = 8%

Let weight of market potfolio be w

then weight of risk free asset = 1-w

& target return is 8% which is weighted average return of risk free asset and market portfolio

So, 8 = (1-w)*2 + w*10

So, w = 0.75

So option b is correct