Reference no: EM132348746

The current risk-free rate is 6 percent and the market risk premium is 5 percent. Erika is preparing to invest $30,000 in the market and she wants her portfolio to have an expected return of 12.5 percent. Erika is concerned about bearing too much stand-alone risk; therefore, she will diversify her portfolio by investing in three different assets (two mutual funds and a risk-free security). The three assets she will be investing in are an aggressive growth mutual fund that has a beta of 1.6, an S&P 500 index fund with a beta of 1, and a risk-free security that has a beta of 0. She has already decided that she will invest 10 percent of her money in the risk-free asset. In order to achieve the desired expected return of 12.5 percent, what proportion of Erika's portfolio must be invested in the S&P 500 index fund?