Do you have to sell or buy the market index fund

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Reference no: EM132054958

Suppose you can invest in only the market index fund and 12-month Treasury bill because of some regulation. E[r]=11%, SD[r]=20%, and rf=3% per year. You are a portfolio manager at Fidelity. Suppose, based on your price of risk and the portfolio theory, you invest today $0.4m in the market index fund and $0.6m in the 12-month treasury bill whose maturity is one year from now. One year later, the annual net return of the market index fund turns out 40%. If E[r], SD[r], rf, and your price of risk remain the same, how should you rebalance your portfolio? That is, do you have to sell or buy the market index fund after you observe its high return of 40%, based on the portfolio theory?

Reference no: EM132054958

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