Assume that you manage a risky portfolio with an expected rate of return of 15%
ID: 2759191 • Letter: A
Question
Assume that you manage a risky portfolio with an expected rate of return of 15% and a standard deviation of 39%. The T-bill rate is 6%. Your client chooses to invest 70% of a portfolio in your fund and 30% 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: Stock A 23% Stock B 32% Stock C 45% What are the investment proportions of your client’s overall portfolio, including the position in T-bills? (Round your answers to 2 decimal places.) Security Investment Proportions T-Bills % Stock A % 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 = (0.30 x 6%) + (0.7 x 15%) = 12.3% per year.
Standard deviation = 0.70 x 39% = 27.3% per year.
b.Investment proportions of the client’s funds:
• 30% in T-bills
• 0.7 x 23% = 16.1% in Stock A
• 0.7 x 32% = 22.4% in Stock B
• 0.7 x 45% = 31.5% in Stock C
c. Reward to volatility ratio = (15% - 6%)/39% = 0.2307