Assume you manage a risky portfolio with an expected rate of return of 8% and a...

Assume you manage a risky portfolio with an expected rate of return of 8% and a standard deviation of 18%. The T-bill rate is 3%. Suppose your client prefers to invest in your portfolio a proportion that maximizes the expected return of the overall portfolio subject to the constraint that the overall portfolio's standard deviation will note exceed 12%. What is the expected return of the overall portfolio? convert your answer to percentages and round to two decimal places

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Expert Solution

Given : Expected rate of return =8%

standard deviation= 18%

T-bill rate = 3%

Maximum portfolio's deviation required = 12 %

So, proportion of risky portfolio y = 12/18 = 66.66%

Expected return of the complete portfolio = 3% + (8% - 3%) * 66.66%

= 0.03 (0.08-0.03) *0.6666

= 0.03( 0.05)* 0.6666

=0.0633*100= 6.33%

jeff jeffy answered 1 year ago

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