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What portion of your overall portfolio should be invested in the international fund?

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Currently, the risk-free rate is 5 percent and the market risk premium is 6 percent. You have your money invested in three assets: an index fund that has a beta of 1.0, a risk-free security that has a beta of 0, and an international fund that has a beta of 1.5. You want to have 20 percent of your portfolio invested in the risk-free asset, and you want your overall portfolio to have an expected return of 11 percent. What portion of your overall portfolio should you invest in the international fund?

a. 0%
b. 40%
c. 50%
d. 60%
e. 80%

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Solution Preview

By CAPM model, the security's expected return is calculated by:

R = Rf+Beta*(Rm-Rf)
So, for ...

Solution Summary

Using the CAPM model, the solution shows all the calculations to arrive at the correct answer.