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 de ation of 33% The T bill rate % Your risky portfolio includes the following investments in the given proportions: Stock A Stock B Stock C 30% 35% 35% 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%. a. What is the proportion y (Round your answer to 2 decimal places.) Proportion y b. 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.) Security T-Bills Stock A Stock B Stock C Proportions c. What is the standard deviation of the rate of retum on your client's portfolio? (Round your intermediate calculations and final answer to 2 decimal places.) Standard deviation % per year

Explanation / Answer

a) Expected return for the client = y*17% + (1-y)*7% = 16%

or, y *(17%-7%) = 16% - 7%

or, y = 0.9

b) Client's investment propotions

c) Standard deviation = 0.9*33% + 0.1*0 = 29.70  %

Security Investment Proportions Calculation T-Bills 10 =(100-90)% Stock A 27 =30*0.9 Stock B 31.5 =35*0.9 Stock C 31.5 =35*0.9

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