Question

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 4.5%.

A client prefers to invest in your portfolio a proportion (y) that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio's standard deviation will not exceed 25%.

What is the expected rate of return on your client's overall portfolio?

Expected rate of return?

Answer 1

Given:

Expected return of risky portfolio = 17%

Let the weight of this riskt portfolio be x1

Standard deviation of risky portfolio = 35%

T-Bill return = 4.5%

Let the weight of T-Bill be x2

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Based on the above information,

Expected return of overall portfolio = (Return of risky asset* weight of risky asset) + (T- bill return* weight of T-Bill)

Portfolio Standard Deviation of overall portfolio = (Standard deviation of risky asset * weight of risky asset)

Since, the question is about maximization of expected return of overall portfolio, given the fact that the overall portfolio standard deviation shoul not exceed 25%

Using excel SOLVER function

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So, Expected Return of overall Portfolio is 13.43%