An investor has $1,000,000 invested in US government bond with an average annual return of 3%....

An investor has $1,000,000 invested in US government bond with an average annual return of 3%. The investor decides to invest 60% of her money on a tech stock that has an average annual return of 8%. The variance of the tech stock is estimated to be .002025.

a. What is the variance of the portfolio created by combining government bond and the tech stock? [ ]

b. What is the expected return to investor’s portfolio? [ ]

c. Find the Sharpe ratio. [ ]

d. Write the equation of the Capital Allocation Line, CAL. [ ]

e. What will be the expected return if the investor takes 6% risk on her portfolio?

Solutions

Expert Solution

1.
=60%*60%*0.002025=0.000729

2.
=60%*8%+40%*3%=6.00%

3.
=(60%*8%+40%*3%-3%)/(60%*SQRT(0.002025))=1.11111111111111

4.
returns=0.06+1.11111111111111*standard deviation

5.
=0.06+1.11111111111111*6%
=12.6667%

jeff jeffy answered 2 years ago

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