00:01
Using leverage to buy the bond of a and b would be the most optimal portfolio to purchase because it will help in reducing the risk as well as maximizing the returns.
01:07
So we are given that the expected return is 12%, the volatility of risk asset is 30%, the risk -free rate is 5%, and the volatility of portfolio with risk -free asset is 18%.
02:00
The volatility of portfolio with risk -free asset equals the weight of risky asset times the volatility of risky asset.
02:50
With our given information, and remember to convert a percentage to a decimal, you just divide the percentage by 100.
02:57
We get 0 .18 equals the weight of risky asset, we're just using some substitution here, times 0 .3, divide both sides by 0 .3, and 0 .18 divided by 0 .3, we get 0 .6 for the weight of risky asset.
03:36
And to put that back into a percentage, you just multiply your decimal by 100 and we get 60 % for the weight of risky asset.
03:56
This means the weight of risk -free asset is 40 % because we take 100%, that's the whole thing, minus the 60%, the weight of the risky asset, and we get 40 % for the weight of the risk -free asset...