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%. Your client chooses to invest 85% of a portfolio in your fund and 15% in a T-bill money market fund. What is the expected return and standard deviation of your client's portfolio? (Round your answers to 2 decimal places.) Suppose your risky portfolio includes the following investments in the given proportions: What are the investment proportions of your client's overall portfolio, including the position in T-bills? (Round your answers to 2 decimal places.) What is the reward-to-volatility ration (S) of your risky portfolio and your client's overall portfolio? (Round your answers to 4 decimal places.) 

Explanation / Answer

a) Expected Return = (0.85 x 0.14) + (0.15 x 0.06) = 0.119 + 0.009 = 12.8%

Standard Deviation = 0.85 x 30% = 25.5%

b) T - Bill = 15%

Stock A = 24% x 0.85 = 20.4%

Stock B = 32% x 0.85 = 27.2%

Stock C = 44% x 0.85 = 37.4%

c) Risky Portfolio = (0.14 - 0.06) / 0.15 = 0.5333

Overall Portfolio = (0.128 - 0.06) / 0.15 = 0.4533

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