Purchase Solution

Optimal Investment: Risks and Expected Return

Not what you're looking for?

Ask Custom Question

Given the following

RF = 5% p.a.
RM = 12% p.a.
RiskM = 10% p.a.

Describe how Jenny might optimally invest $1,000,000 in a portfolio of financial assets to earn an expected return of 14% p.a. and determine the risk that she would face in doing so. State all necessary assumptions.

Purchase this Solution
Solution Summary

With formulas and good explanation, the solution shows how to answer the problem, and provides an answer.

Solution Preview

Refer to attached file.

Given the following

RF = 5% p.a.
RM = 12% p.a.
M = 10% p.a.

Describe how Jenny might optimally invest $1,000,000 in a portfolio of financial assets to earn an expected return of 14% p.a. and determine ...

Purchase this Solution
Free BrainMass Quizzes
Lean your Process

This quiz will help you understand the basic concepts of Lean.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Introduction to Finance

This quiz test introductory finance topics.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.

View More Free Quizzes
Related BrainMass Solutions

  • EFFICIENT FRONTIER AND OPTIMAL PORTFOLIO

    The maximum expected return appears at the right hand end of the frontier, and always consists of a single asset (the one with the highest expected return). The "optimal" portfolio can be defined in one of two ways: 1.

  • Cost of capital and risk

    In the concept where higher risks have higher returns, this will be contradicted in a two alternatives situation where one with higher risks (higher CV) has lower expected return than one with lower risks (lower CV) but has higher expected return.

  • Investment Strategies and Taxes.

    Investment strategies which are designed to avoid taxes contradict the principles of efficient diversification since the investor will always search for the highest expected return for the portfolio risk level while the investment strategies are actually

  • Cost of Capital, Capital Budgeting, Capital Structure

    Assuming the risk-free rate is 1%, the expected return on the stock market is 7%, and the company's beta is 1.0, what is the required return for common stockholders (i.e., component cost of common stock)? d.

  • International Finance Statements

    Taken to the extreme, if a company is over leveraged and cannot pay its debt then the company is at risk which therefore makes the investment even riskier. Can you illustrate how the financial leverage increases the expected return on equity?

  • Characteristics of an Efficient Portfolio

    The efficient portfolio is one that gives the greatest expected return for a given level of risk, or for an expected level of return gives the lowest risk. Efficient portfolio is also called optimal portfolio.

  • Relationship between risk aversion and investment decisions

    I believe this illustrates the concept of risk aversion among corporate managers - they are looking for an optimal trade-off between risk and return; rather than looking to avoid risk altogether.

  • The James Bond Fund

    Finally, the current expected return for investment-grade (I) bonds is 9%, and it is 12% for junk (J) bonds. A.

  • Optimal Portfolio for an Investor

    Expected return of Portfolio Asset returns are denoted by ri. In a 2 asset case Variance of portfolio Where = Correlation Coefficient . Expected return on N-asset portfolio 2.

  • CAPM For Personal Investment Decisions

    If the expected return is not equal to or is higher than the required return, I disregard the investment. I make use of the CAPM to determine the shares' sensitivity to non-diversifiable risks or market risks.

View More Related Solutions