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You manage an equity fund with an expected risk premium of 12.6% and a standard deviation...

You manage an equity fund with an expected risk premium of 12.6% and a standard deviation of 40%. The rate on Treasury bills is 6.4%. Your client chooses to invest $75,000 of her portfolio in your eq50uity fund and $75,000 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.)

What does the expected return equal (%)?

What does the standard deviaiton equal (%)?

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Answer #1

Total investment : 75000+75000 = 150000

Return on equity =risk free rate +risk premium

                  = 6.4 +12.6

                  = 19%

Expected return : [19*75000/150000]+[6.4*75000/150000]

        = 9.5+ 3.2

         = 12.70%

standard deviation of portfolio = SD of equity *weight of equity

                      = 40 *75000/150000

                       = 20%

**as treasury bill is risk free security.

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