Question

Assume that you manage a risky portfolio with an expected rate of return of 13% and a standard deviation of 45%. The T-bill rate is 6%. Your client chooses to invest 75% of a portfolio in your fund and 25% in a T-bill money market fund.

a. What is the expected return and standard deviation of your client's portfolio? (Round your answers to 2 decimal places.)

Expected return	?%
Standard deviation	? %

b. Suppose your risky portfolio includes the following investments in the given proportions:

Stock A	29%
Stock B	38%
Stock C	33%

What are the investment proportions of your client’s overall portfolio, including the position in T-bills? (Round your answers to 2 decimal places.)

Security	Investment   Proportions
T-Bills		?%
Stock A		?%
Stock B		?%
Stock C		?%

c. What is the reward-to-volatility ratio (S) of your risky portfolio and your client's overall portfolio? (Round your answers to 4 decimal places.)

	Reward-to-Volatility Ratio
Risky portfolio	?
Client’s overall portfolio	?

Answer 1

a.

expected return = weight of stock fund*return of stock fund+weight of t bill fund*return of t bill fund

=0.75*13+0.25*6=11.25%

std dev= weight of stock fund*std dev of stock fund

=0.75*45=33.75%

b.

proportion of:

tbill = 0.25

stockA = weight of stock fund*weight of stock A = 0.75*0.29 =21.75%

stock B= weight of stock fund*weight of stock B = 0.75*0.38=28.5%

stock C= weight of stock fund*weight of stock C = 0.75*0.33=24.75%

c.

risky portfolio R to V = expected return of risky portfolio/std dev of risky portfolio=13/45=0.288

client portfolio R to V = expected return of client portfolio/std dev of client portfolio=11.25/33.75=0.333