Assume that you manage a risky portfolio with an expected rate of return of 15%

Question

Assume that you manage a risky portfolio with an expected rate of return of 15% and a standard deviation of 37%. The T-bill rate is 5%

A client prefers to invest in your portfolio a proportion (y) that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio's standard deviation will not exceed 25%.

a. What is the investment proportion, y? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Investment proportion y             %

b. What is the expected rate of return on the overall portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Rate of return             %

Stock A 21 % Stock B 30 % Stock C 49 % Assume that you manage a risky portfolio with an expected rate or return of 15% and a standard deviation or 37%. The T-bill rate is 5% Stock A Stock B Stock C 21% 30% 49% A client prefers to invest in your portfolio a proportion (y) that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio's standard deviation will not exceed 25% a. What is the investment proportion, y? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Investment proportion y b. What is the expected rate of return on the overall portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Rate of return

Explanation / Answer

a) Standard deviation of T-bill is zero as it provides a fixed risk free return. Therefore, overall portfolio standard deviation is comprised only of the risky portfolio standard deviation.

Overall portfolio standard deviation = Risk portfolio standard deviation x Weight of risky portfolio

or, 25% = 37% x y

or, y = 25% / 37% = 0.6757 or 67.57%

b) Weight of T-bill = 100% - 67.57% = 32.43%

Expected return of overall portfolio = Expected return of risk portfolio x Weight of risky portfolio + Expected return of T-bill x Weight of T-bill

or, Expected return of overall portfolio = 15% x 67.57% + 5% x 32.43% = 11.7568 or 11.76%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---