What proportions of your funds should be in risk-free asset

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Question - Suppose you are an investment professional who is considering to invest in a portfolio of three risky assets, S₁, S₂ and S₃. Suppose that the risk-free rate of return is 1%. It is known that the tangency portfolio contains 5% of S₁, 30% of S₂ and 65% of S₃. It is also known that the expected return and the standard deviation of the return for the tangency portfolio are 10% and 5% respectively.

(a) If you want the volatility (standard deviation) of the return on a portfolio to be 3%, what proportions of your funds should be in the risk-free asset, asset S₁, asset S₂ and asset S₃?

(b) If you want the expected return on your investment to be 13%, what proportions of your funds should be in the risk-free asset, asset S₁, asset S₂ and asset S₃?

Reference no: EM132179469

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