Assume that you manage a risky portfolio with an expected rate of return of 16%

Question

Assume that you manage a risky portfolio with an expected rate of return of 16% and a standard deviation of 40%. The T-biII rate is 4%. Your client chooses to invest 80% of a portfolio in your fund and 20% in a T- bill money market fund. a. What is the expected return and standard deviation of your client?s portfolio? (Round your answers to 2 decimal places.) Expected return % per year Standard deviation % per year b. Suppose your risky portfolio includes the following investments in the given proportions: StockA 24% Stock B 33% Stock C 43% What are the investment proportions of your client?s overall portfolio, including the position in T-bills? (Round your answers to 2 decimal places.) Investment Security Proportions T-Bills StockA % Stock B % Stock C % c. What is the reward-to-volatility ratio (S) of your risky portfolio and your client?s overall portfolio? (Round your answers to 4 decimal places.) Reward-to-Volatility Ratio Risky portfolio Client?s overall portfolio

Explanation / Answer

a. Expected return = 0.80 * 16% + 0.20 * 4%

= 13.6%

Standard deviation = 0.80 * 40%

= 32%

b. T-bills = 20%

Stock A = 0.80 * 24%

= 19.2%

Stock B = 0.80 * 33%

= 26.4%

Stock C = 0.80 * 43%

= 34.4%

c. Risky portfolio = (16% - 4%) / 40%

= 0.3

Client's overall portfolio = (13.6% - 4%) / 32%

= 0.3

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