Finance/Economic

[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%

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%.

[FrankieY18]

how did you get that/

[Svak]

Post answers If you know them. Without answers, not many would like to venture and help you with solution.


You get 6.5 with interpolation.

[Gandalf]

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)