Assume that you manage a risky portfolio with an expected rate of return of 17%
ID: 2640086 • Letter: A
Question
Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 33%. The T-bill rate is 7%. Stock A 30 % Stock B 35 % Stock C 35 % 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 30%. 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) Mean return on portfolio
= Rf + (Rp - Rf )y
= 7% + (17% - 7%)y
= 7% + 10% y I
f the mean of the portfolio is equal to 30%, then solving for y we will get: 30% = 7% +10%y => y = (30% - 7%)/10% => y = 2.3 Thus, in order to obtain a mean return of 30%, the client must invest 80% of total funds in the risky portfolio and 20% in Treasure bills.
(b) Investment proportions of the client