An investor is uncertain about how much to invest in two

Reference no: EM13380952

An investor is uncertain about how much to invest in two risky assets. The first asset (equity) yields an expected return of 12% and has a standard deviation equal to 8%. The second asset (debt) yields an expected return of 6% and has a standard deviation of 5%. The correlation coefficient between the returns is -0.1.

Compute the expected return and standard deviation of the following portfolios:

Portfolio	Percentage in equity	Percentage in debt
1	75	25
2	50	50
3	25	75

Portfolio	% in debt	% in eq	ExRet	Var	SD
3	0.75	0.25	0.075	0.001731	0.041608
2	0.5	0.5	0.09	0.002125	0.046098
1	0.25	0.75	0.105	0.003681	0.060673

Sketch the set of portfolios composed of debt and equity in the mean-standard deviation space and identify portfolios 1, 2 and 3.
Would a rational risk-averse investor ever choose a portfolio entirely composed of debt? Would a rational risk-averse investor ever choose a portfolio entirely composed of equity?

Reference no: EM13380952

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