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    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)Ythe asset returns are random, with E(X) = μX = 0.05, E(Y) = μy = 0.01, and 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.

    Is this kind of a trick question, as my thinking is you would allocate 100% of the portfolio to asset X as it has the highest expected returns?
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    (Original post by mikegmike)
    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)Ythe asset returns are random, with E(X) = μX = 0.05, E(Y) = μy = 0.01, and 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.

    Is this kind of a trick question, as my thinking is you would allocate 100% of the portfolio to asset X as it has the highest expected returns?
    Agreed.

    A variation on the question here has more meat, and I suspect is the original question on which yours is based.
 
 
 
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