Suppose the current T-bill rates is 5%, the expected return for stock A is 15%, with a standard deviation of

Question:

Suppose the current T-bill rates is 5%, the expected return for stock A is 15%, with a standard deviation of 15%, the expected return for a real estate asset is 10%, with a standard deviation of 10%. Correlation between stocks and real estate is 25%.

a. If we borrow $0.5 at the risk-free rate, and invest $1.5 in stocks. What is the expected return and risk?

b. What is the expected return and standard deviation if we hold 50% real estate asset and 50% stocks?

c. If we borrow $1 at the risk-free rate, and invest $2 in the risky mixed asset portfolio. What is the expected return and risk?

Expert Answer:

Answer rating: 100% (QA)

a Expected Return and Risk of the Portfolio with Stocks and Risk Free Asset Let s denote the risk free rate as RF the expected return of stock A as RA and the standard deviation of stock A as A Given

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