What is the expected return and standard deviation

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Reference no: EM131989917

You get a fund manager job due to your excellent performance at UMass. Now you are managing a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. You think that this risky portfolio is best one that you can construct to deliver the best tradeoff between risk premium and return. The T-bill rate is 7%.

(1) Your client Eric 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 Eric’s portfolio?

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

Stock A … 27%

Stock B … 33%

Stock C … 40%

What are the investment proportions of your client’s overall portfolio, including the position in T-bills?

(d) 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.

(2) Eric just had a baby last year and he needs money. So he decides to invest in your risky portfolio a proportion (y) of his total investment budget so that his overall portfolio will have an expected rate of return of 15%.

(a) What is the proportion y?

(b) What are your client’s investment proportions in your three stocks and the T-bill fund?

(3) However, Eric’s wife is a little bit worried about the risk of the new portfolio. She wanted Eric to make sure that the overall portfolio’s standard deviation should not exceed 20%.

(a) What is the investment proportion, y?

(b) What is the expected rate of return on the overall portfolio?

Reference no: EM131989917

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