Question

In: Finance

You manage an equity fund with an expected risk premium of 13.2% and a standard deviation...

You manage an equity fund with an expected risk premium of 13.2% and a standard deviation of 46%. The rate on Treasury bills is 4.6%. Your client chooses to invest $105,000 of her portfolio in your equity fund and $45,000 in a T-bill money market fund. What is the reward-to-volatility (Sharpe) ratio for the equity fund? (Round your answer to 4 decimal places.)

Solutions

Expert Solution

Weight of Equity in Portfolio =105000/(105000+45000) =70%
Weight of T-bill money=45000/(105000+45000)=30%

Expected Return on equity =13.2%+4.6% =17.80%

Return on portfolio =Weight of Equity*Cost of Equity +Weight of Risk Free Asset*Cost of Risk free asset
=70%*17.80%+30%*4.6% =13.84%

Standard Deviation of Risk free asset =0
Standard Deviation of Portfolio =((Weight of Equity*Standard Deviation of Equity)+(Weight of Risk free asset*Standard Deviation of risk free asset))^2 =((70%*46%)^2+(30%*0%)^2)^0.5 =32.20%

Reward to Risk ratio =(Return on portfolio-Risk free rate)/Standard Deviation =(13.84%-4.6%)/32.20% =0.2870


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