Question

2 You manage an equity fund with an expected risk premium of 13% and a standard deviation of 44%. The rate on Treasury bills is 6.6%. Your client chooses to invest $90,000 of her portfolio in your equity fund and $60,000 in a T-bill money market fund. What is the expected return and standard deviation of return on your client’s portfolio? (Round your answers to 2 decimal places.)

Expected Return		%
Standard Deviation		%

Answer 1

Expected return on equity fund = Expected risk premium + risk free return=13+6.6=19.6%

Weight of equity fund = Investment in equity fund /Total investment=90,000/(90,000+60,000)=0.6

Weight of T bill = 1-weight of equity fund=1-0.6=0.4

Expected return of client portfolio =

Weight of equity fund* Expected return of equity fund+ weight of T bill* Expected return on T bill

=0.6*19.6+0.4*6.6=14.4%

Standard deviation of client portfolio=weight of equity fund * standard deviation of equity fund

=0.6*44=26.4%