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