Assume that you manage a risky portfolio with an expected rate of return of 23%
ID: 2780252 • Letter: A
Question
Assume that you manage a risky portfolio with an expected rate of return of 23% and a standard deviation of 43%. The T-bill rate is 3%
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 35%.
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 %
Stock A 27 % Stock B 36 % Stock C 37 %Explanation / Answer
a.
Std dev of the complete risky portfolio = y*0.43
If the client wants std dev to be less than 35%
y*0.43 = 0.35
y = 0.8140 = 81.40%
b.
Expected return on the portfolio is the weighted average of individual returns
% in risk free investment = 1-0.08140
Rate of return = 0.8140*0.23 + (1-0.8140)*0.03 = 0.1928 = 19.28%