Assume that you manage a risky portfolio with an expected rate of return of 17%

Question

Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 35%. The T-bill rate is 4.5%.

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 budget with the remainder in a T-bill money market fund so that his overall portfolio will have an expected rate of return of 16%.

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.)

Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 35%. The T-bill rate is 4.5%.

Explanation / Answer

a)  Mean return on portfolio = Rf + (Rp - Rf)y

=4.5%+(17%-4.5%)y

=4.5%+13.5%y

If the mean of the portfolio is = 16% then 16%=4.5%+13.5%y

or 16%-4.5%/13.5%=y

or 0.85=y

the client must invest 85% of total funds in the risky portfolio and 15% in Treasure bills.

b) T Bills

Stock A=0.85*34=28.9%

Stock B=0.85*37=31.45%

Stock C=0.85*29=24.65%

c)the standard deviation of the rate of return on your client's portfolio is =0.85*35%=29.75% per year

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