3. An investor must choose what proportion of wealth to spend on each of two risky assets.
Let the return to these two assets be X and Y respectively, and let w be the proportionof wealth spent on X (so 1 − w is spent on Y).
So the return to the chosen portfolio isR = wX + (1 − w)Y
The asset returns are random, with E(X) = μX = 0.05, E(Y) = μy = 0.01,
The variancesare σ2X= 0.002 and σ2Y= 0.004
(a) [30%] Find the fraction of the portfolio to be invested in asset X if the investor wishesto maximise the expected return to the portfolio. Explain your answer.
Can someone please explain how to answer this question?
Many thanks
Let the return to these two assets be X and Y respectively, and let w be the proportionof wealth spent on X (so 1 − w is spent on Y).
So the return to the chosen portfolio isR = wX + (1 − w)Y
The asset returns are random, with E(X) = μX = 0.05, E(Y) = μy = 0.01,
The variancesare σ2X= 0.002 and σ2Y= 0.004
(a) [30%] Find the fraction of the portfolio to be invested in asset X if the investor wishesto maximise the expected return to the portfolio. Explain your answer.
Can someone please explain how to answer this question?
Many thanks