Assume that you manage a risky portfolio with an expected rate of return of 17%
ID: 2817270 • Letter: A
Question
Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 33%. The T-bill rate is 7%
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 30%.
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 30 % Stock B 35 % Stock C 35 %Explanation / Answer
Return=y*17%+(1-y)*7%=7%+10%*y
Standard deviation=y*33%
Given, y*33%<=30%
=>y<=0.90909
As return increases with y maximum return occurs at y=0.90909 or 90.909%
Expected return=7%+10%*y=7%+10%*90.909%=16.0909%