## (Solved) Info from book: Andrea Corbridge is considering forming a portfolio consisting of Kalama Corp. and Adelphia Technologies. The two corporations have a...

I have attached both info/questions from book and answers. I know the answers are correct and have attached them to make it easier for you,Â but I need to know how this exact solution in bold belowÂ (optimal combination 53% and 47%) was found from 98 possibilities so I can show my work or explain.

The optimal combination of Kalama and Adelphia is 53% and 47%, respectively. This results in a risky portfolio return of 18.74% and a standard deviation of 17.65%. As Andrea wants to earn a return of 19%, she will need to borrow money at the risk-free rate.Â Â

Info from book: Andrea Corbridge is considering forming a portfolio consisting of Kalama Corp. and Adelphia
Technologies. The two corporations have a correlation of -0.1789, and their expected returns and
standard deviations are as follows:
Kalama
Corp. Adelphia Technologies Expected return (%) 14.86 23.11 Standard Deviation (%) 23.36 31.89 1. Calculate the frontier for all possible investment combinations of Kalama Corp.
and Adelphia Technologies (from 0% to 100%, in 1% increments). Determine the
optimal risky portfolio if the risk-free rate is 3%.
2. Andrea has \$50,000 and wants to earn a 19% expected return on her investment.
What is the optimal manner in which to structure her portfolio-both in dollar
amounts and in weights relative to her \$50,000-based on the preceding
99%
98%
97%
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92%
91%
90%
89% 1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11% Standard Deviation
23.07%
22.79%
22.51%
22.23%
21.96%
21.70%
21.44%
21.18%
20.94%
20.69%
20.46% Expected Return
14.94%
15.03%
15.11%
15.19%
15.27%
15.36%
15.44%
15.52%
15.60%
15.69%
15.77% 88%
87%
86%
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84%
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53%
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50%
49%
48%
47%
46% 12%
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45%
46%
47%
48%
49%
50%
51%
52%
53%
54% 20.23%
20.00%
19.78%
19.57%
19.37%
19.18%
18.99%
18.81%
18.64%
18.47%
18.32%
18.17%
18.03%
17.90%
17.78%
17.67%
17.58%
17.49%
17.41%
17.34%
17.28%
17.23%
17.19%
17.16%
17.14%
17.14%
17.14%
17.16%
17.18%
17.22%
17.26%
17.32%
17.39%
17.47%
17.55%
17.65%
17.76%
17.87%
18.00%
18.14%
18.28%
18.43%
18.60% 15.85%
15.93%
16.02%
16.10%
16.18%
16.26%
16.35%
16.43%
16.51%
16.59%
16.68%
16.76%
16.84%
16.92%
17.01%
17.09%
17.17%
17.25%
17.34%
17.42%
17.50%
17.58%
17.67%
17.75%
17.83%
17.91%
18.00%
18.08%
18.16%
18.24%
18.33%
18.41%
18.49%
18.57%
18.66%
18.74%
18.82%
18.90%
18.99%
19.07%
19.15%
19.23%
19.32% 45%
44%
43%
42%
41%
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39%
38%
37%
36%
35%
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31%
30%
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19%
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17%
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14%
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11%
10%
9%
8%
7%
6%
5%
4%
3% 55%
56%
57%
58%
59%
60%
61%
62%
63%
64%
65%
66%
67%
68%
69%
70%
71%
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83%
84%
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86%
87%
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89%
90%
91%
92%
93%
94%
95%
96%
97% 18.77%
18.94%
19.13%
19.32%
19.53%
19.73%
19.95%
20.17%
20.40%
20.64%
20.88%
21.12%
21.38%
21.64%
21.90%
22.17%
22.44%
22.72%
23.00%
23.29%
23.58%
23.88%
24.18%
24.84%
24.79%
25.10%
25.41%
25.73%
26.05%
26.38%
26.70%
27.03%
27.36%
27.70%
28.04%
28.38%
28.72%
29.06%
29.41%
29.76%
30.11%
30.46%
30.82% 19.40%
19.48%
19.56%
19.65%
19.73%
19.81%
19.89%
19.98%
20.06%
20.14%
20.22%
20.31%
20.39%
20.47%
20.55%
20.64%
20.72%
20.80%
20.88%
20.97%
21.05%
21.13%
21.21%
21.30%
21.38%
21.46%
21.54%
21.63%
21.71%
21.79%
21.87%
21.96%
22.04%
22.12%
22.20%
22.29%
22.37%
22.45%
22.53%
22.62%
22.70%
22.78%
22.86% 2%
1% 98%
99% 31.17%
31.53% 22.95%
23.03% #2
The optimal combination of Kalama and Adelphia is 53% and 47%, respectively. This results in a risky
portfolio return of 18.74% and a standard deviation of 17.65%. As Andrea wants to earn a return
of 19%, she will need to borrow money at the risk-free rate. 0.19 = (1- wm) .03 + wm .1874
wm = 101.65% Of the \$50,000 Andrea has, she should place 101.65%, or \$50,825.92 in the optimal portfolio of
Kalama and Adelphia. Thus, she needs to borrow \$825.92 at the risk-free rate.

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This question was answered on: Sep 05, 2019

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Sep 05, 2019

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