Answers
Answer - Suppose Mr X is considering investment of portfolio
We have 3 asset i.e. treasury , X stock and Y stock
Optimal weights of portfolio
Treasury = 75%
Rest Mr x wants to put 25% in X and Y
Optimal weights of risky securities
X = 25% *0.6
( as mentioned in the question about optimal weights)
= 15%
Y = 25%*0.4
= 10%
Thus treasury = 75%
X Stock = 15%
Y Stock = 10%
If Mr. X has $1000 to invest, then proportionate amount is
Treasury = 1000*75%
= $750
X Stock = 1000*15%
= $150
Y stock = 1000*10%
=$100
Thus dollar value of X and Y are $150 and $100 respectively.
expected return = 0.75 * treasury + 0.15*X stock + 0.10*Ystock
= 0.75(5%)+ 0.15(14%) +0.10(10%)
=6.85%
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