I am asked to solve the following homework question: Risk free rate: 2% Expected excess return on market portfolio: 8% Standard deviation of market portfolio: 20% The efficient portfolio has the following: Expected return: 12% Standard deviation: 25%
I am asked the following question: "How can the expected return of the wining portfolio be achieved? Specify the amount invested in each asset/portfolio of assets?" and I've used the following calculation to determine portfolio weight of 1.25: 0.12=ω0.1+(1-ω)0.02⇒ω=1.25
And here is where I am a little lost. What does it mean to have the portfolio weight >1 and what does it mean? If it's incorrect, where did I go wrong before? Thanks for any help!