Reference no: EM132921206

Question - Assume that you manage a risky portfolio with an expected rate of return of 14% and a standard deviation of 38%. The T-bill rate is 4%.

Your client has a total investment budget of $680,000. She decides to invest in your risky portfolio a proportion of her total investment budget with the remainder in a T-bill money market fund so that her overall portfolio will have an expected rate of return of 11%.

Required -

1. What is the amount invested in your risky portfolio? What is the standard deviation of your client's portfolio? Calculate the amount of the expected gain of your client (in dollars).

2. What is the reward-to-volatility ratio of your risky portfolio and your client's overall portfolio?

3. Draw the CAL of your portfolio on an expected return/standard deviation diagram. What is the slope of the CAL? Show the position of your client on your fund's CAL.

4. You estimate that a passive portfolio invested to mimic the S&P 500 stock index provides an expected rate of return of 9% and a standard deviation of 28%. Draw the CML and your fund's CAL on an expected return/standard deviation diagram.

5. Your client is considering adopting a passive strategy. She prefers investing in the market portfolio a proportion (y) that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio standard deviation will not exceed 26.6%.

a- What is the expected rate of return on the overall portfolio?

b- Do you agree with her? Support your answer with relevant calculations.

6. Redo question 5-b assuming your required portfolio management fee is 0.95% of total assets under management.