Assume that you manage a risky portfolio with an expected rate of return of 15%

Question

Assume that you manage a risky portfolio with an expected rate of return of 15% and a standard deviation of 25%. The T-bill rate is 5%. a. Your client chooses to invest 60% of a portfolio in your fund and 40% in a T-bill money market fund What is the expected return and standard deviation of your client's portfolio? b. 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?

Explanation / Answer

a)Standard Deviation=0.6*25=15% per year

mean=0.6*15+0.4*5=11% per year.

Mean return on portfolio=Rf+(RP-Rf)y

=5+(15-5)y=5+10y

If the mean of the portfolio is equal to 15%, then solving for y we will get:

y=1

Thus, in order to obtain a mean return of 15%, the client must invest 100% of total funds in the
risky portfolio

walmart=1*30=30%

Microsoft=1*25=25%

General Motors=1*45=45%

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