Assume that you manage a risky portfolio with an expected ra

Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 35%. The T-bill rate is 5%. Your client chooses to invest 70% of a portfolio in your fund and 30% 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.)

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

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

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.)

Solution

a.

Expected return = 0.7*17% + 0.3*5% = 13.40%

Standard dev = 0.7*35% = 24.50%

b.

T bills = 30.00%

A = 0.7*34% = 23.80%

B = 0.7*37% = 25.90%

C = 0.7*29% = 20.30%

c.

risky portfolio = 17/35 = 0.4857

clients portfolio = 13.4/24.5 = 0.5469