Assume that you manage a risky portfolio with an expected rate of return of 14%

Question

Assume that you manage a risky portfolio with an expected rate of return of 14% and a standard deviation of 30%. The T-bill rate is 6% Stock A Stock B Stock C 24 % 32 % 44 % A client prefers to invest in your portfolio a proportion () that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio's standard deviation will not exceed 20%. 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.

The client wants to invest investment proportion Y in which standard deviation does not exeeds 20%.

Standardd eviation of risky portfolio = 30%

Standard deviation of risk free assets = 0%

20% = (30% × Y) + (0 × 1 - Y)

Y = 20% / 30%

Y = 66.67%

Investment proportion Y is 66.67%.

So investor has invested 66.67% in risky portfolio and 33.33% in risk free T bill.

b.

Expected return of portfolio = (14% × 66.67%) + (6% × 33.33%)

= 9.33% + 2.00%

= 11.33%

Expected return of overall portfolio is 11.33%.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---