Reference no: EM132418400

Problem: Assume that there are only two asset classes in the optimal risky portfolio: stocks and long-term corporate bonds, and their annual expected returns are 20% and 10%. If the investor's desired annual return is 12%, given the expected return information on the previous problem (optimal risky portfolio with expected return of 16% and a risk free rate of 4%), what should be the weights of different asset classes in the portfolio, including risk-free asset, stock and long-term bonds? Please describe the complete solution of this problem.