Assume that you manage a risky portfolio with an expected rate of return of 18%

Question

Assume that you manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 34%. The T-bill rate is 5.5%. Your risky portfolio includes the following investments in the given proportions: Your client decides to invest in your risky portfolio a proportion (y) of his total investment remainder in a T-bill money market fund so that his overall portfolio will have an expected 17%. What is the proportion y? (Round your answer to 2 decimal places.) What are your client's investment proportions in your three stocks and the T-bill fund? (Round your intermediate calculations and final answers to 2 decimal places.) What is the standard deviation of the rate of return on your client's portfolio? (Round your intermediate calculations and final answer to 2 decimal places.)

Explanation / Answer

1) 18*Y +5.5*(1-Y) =17 => Y = 92%

2) T-Bill = 8%

   Stock A = (92*32)/10000 = 29.44%

   Stock B = (92*36)/10000 = 33.12%

   Stock A = (92*32)/10000 = 29.44%

3) Standard Deviation = [0.92(18 - 17)2+0.08(5.5-17)2]1/2 = 3.39%

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