Question

Mr. PELAGIE has a sum of €30,000. He decides to invest the entire amount in stocks from the LEONARD company. The risk-free rate is 5%, the expected profitability of this portfolio of securities is 12%, that of the market portfolio is 10%. The volatility of LEONARD stock is 30%. The volatility of the market security is 13%. What is the composition of the portfolio with the minimum volatility, but which offers the same profitability than that of the LEONARD share?

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Answer to a math question Mr. PELAGIE has a sum of €30,000. He decides to invest the entire amount in stocks from the LEONARD company. The risk-free rate is 5%, the expected profitability of this portfolio of securities is 12%, that of the market portfolio is 10%. The volatility of LEONARD stock is 30%. The volatility of the market security is 13%. What is the composition of the portfolio with the minimum volatility, but which offers the same profitability than that of the LEONARD share?

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Neal
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95 Answers
Given the details provided, we want to find the composition of the portfolio with the same expected return as the LEONARD stock but with the minimum volatility.

Let:
- w_m be the proportion of the portfolio invested in the market portfolio,
- w_f = 1 - w_m be the proportion invested in the risk-free asset.

The expected return of the portfolio combining the risk-free asset and the market portfolio is:
r_p = w_f \cdot r_f + w_m \cdot r_m

Given r_p = r_L = 12\%, we can solve for w_m.

The portfolio volatility is a weighted average of the volatilities of the market and risk-free asset:
\sigma_p = w_m \cdot \sigma_m

Given the data:
- r_f = 5\%,
- r_L = 12\%,
- r_m = 10\%,
- \sigma_L = 30\%,
- \sigma_m = 13\%,

we can plug in the values and solve for w_m:
12\% = (1 - w_m) \cdot 5\% + w_m \cdot 10\%

Solving for w_m:
12\% = 5\% - 5\% \cdot w_m + 10\% \cdot w_m
12\% = 5\% + 5\% \cdot w_m
5\% \cdot w_m = 7\%
w_m = 1.4

\therefore The proportion of the portfolio invested in the market portfolio is approximately 140%.

\boxed{w_m = 1.4}

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