Question

You manage an equity fund with an expected risk premium of 10%
and a standard deviation of 14%.

The rate on T-bills is 6%. Your client chooses to invest $60,000 of
her portfolio in your equity fund

and $40,000 in T-bills.

What is the expected return of your client's portfolio?

Answer #1

Answer :- **Expected return on client's portfolio :-
12%**

Calculation of client's portfolio :-

= (Weight of equity fund * Return in equity fund ) + (Weight of T-bill * Return in T-bill)

= (0.60 * 16%) + (0.40 * 6%)

= 9.6 % + 2.4%

= **12%**

Note :-

(i) Calculation of return on equity fund = T-bill rate + risk premium

= 6% + 10% = **16%**

(ii) return on t-bill = **6%** (given)

(iii) Weight if equity fund & T-bill

Equity fund = 60000/100000 = **0.60**

T-bill = 40000/100000 = **0.40**

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