Quiz 3

Portfolio Expected Return and Standard Dev.

Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. The T-bill rate is 7%. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. 1. Portfolio Expected Return w1E(r1)+w2(E(r2) (.3*.07)+(.7*.17)=14% per year 2. Standard Deviation .7*.27=18.9% per year

What is the reward-to-volatility ratio (S) of your risky portfolio and your client's overall portfolio?

Risky portfolio = (.17 - .07)/(.27) = .3704 Overall portfolio = (.14-.07)/(.189) = .3704

Suppose your risky portfolio includes the following investments in the given proportions: Stock A 27% Stock B 33% Stock C 40% 30% in T Bill & 70% in your account What are the investment proportions of your client's overall portfolio, including the position in T-bills?

T- Bill- 30% (from question) Stock A: .27*.7= 18.9% Stock B: .33*.7= 23.1% Stock C: .40*.7= 28%