Hello, I need help with the following problem in Finance.
A portfolio gives a 10% return with a standard deviation of 18%. You would like the standard deviation to drop to 14%. What should you do?
What should you do if you want the standard deviation to rise to 23%?
Our notes provide us with the correct answers, but I don’t understand how they were reached. Please provide a step by step calculations on how these
answers were reached.
Here are the answers in our notes:
For the standard deviation to drop to 14% it says the answer is to add more risk-free assets until they account for 4/18 of the portfolio. Don’t understand how 4/18 was reached or why that is the solution?
For the standard deviation to rise to 23%, it says the answer is to use debt to finance an increase in the size of the portfolio by 5/18. Again, how was 5/18 calculated and why?
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