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#1
05-12-2004, 06:37 PM
 FrankieY18 Member Join Date: Sep 2003 Posts: 458
Finance/Economic

You are given:
i) the risk free rate of return is 4%
ii) a risky asset is available with a mean return of 9% and a standard deviation of 2%.

Determine the maximum rate of return you can achieve if you are willing to accept a standard deviation of 1%
#2
05-12-2004, 07:39 PM
 GuyInWestGrove Guest Posts: n/a
Re: Finance/Economic

Quote:
 Originally Posted by FrankieY18 You are given: i) the risk free rate of return is 4% ii) a risky asset is available with a mean return of 9% and a standard deviation of 2%. Determine the maximum rate of return you can achieve if you are willing to accept a standard deviation of 1%
6.5%.
#3
05-12-2004, 07:42 PM
 FrankieY18 Member Join Date: Sep 2003 Posts: 458

how did you get that/
#4
05-12-2004, 07:56 PM
 Svak Member Join Date: Jun 2002 Location: Lost Posts: 150

You get 6.5 with interpolation.
#5
05-12-2004, 08:31 PM
 Gandalf Site Supporter Site Supporter SOA Join Date: Nov 2001 Location: Middle Earth Posts: 26,560

Let x be the fraction invested risky.

Then (x^2)*(.02^2) is the variance of return since there is no risk associated with the risk free asset.

Thus .02x is the standard deviation of the rate of return.

You accept SD at most .01, so x is at most .5

(1-x)*4% + x*9% = 6.5% for x = .5 (and is less than 6.5% for any other acceptable value of x)

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