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Portfolio Theory

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Assume that the risk free rate of return is 3% and the market portfolio on the capital market line (CML) has an expected return of 11% and a standard deviation of 14%. How should you invest $100 000 if you are only willing to accept a total portfolio risk of 8%?

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Solution Summary

Portfolio theory is examined. How someone should invest $100000 if you are only willing to accept a total portfolio risk of 8%.

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Recall the following formula for portfolio variance of two assets:

portfolio variance = (sd1)^2*(weight1)^2 + (sd2)^2*(weight2)^2 + ...

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