You Invest $100 in a Risky Asset with an Expected

question 37

Multiple Choice

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045.
-What percentages of your money must be invested in the risky asset and the risk-free asset,respectively,to form a portfolio with an expected return of 0.13?

• A)130.77% and -30.77%
• B)-30.77% and 130.77%
• C)67.67% and 33.33%
• D)57.75% and 42.25%
• E)cannot be determined

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Definitions:

Net Cash Flow

The difference between a company's cash inflows and outflows within a specified period, indicating its financial health.

Net Investment

The total amount spent on new capital assets, minus depreciation, indicating the actual increase in physical capital.

Incremental Basis

An approach that evaluates the additional benefits and costs of a decision by comparing the financial outcomes with or without the decision.

Pretax Basis

Financial calculations or comparisons made before deducting income tax expenses, providing a raw snapshot of performance or position.