Assume that you manage a risky portfolio with an expected rate of return of 12% and...

a.	What is the expected return and standard deviation of your client's portfolio? (Enter your answer as a percentage rounded to two decimal places.)


Expected return	% per year
Standard deviation	% per year

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


Stock A	28%
Stock B	37%
Stock C	35%

What are the investment proportions of your client’s overall portfolio, including the position in T-bills? (Enter your answer as a percentage rounded to two decimal places.)

Security	Investment Proportions
T-Bills		%
Stock A		%
Stock B		%
Stock C		%

c.	What is the reward-to-volatility ratio (S) of your risky portfolio and your client's overall portfolio? (Enter your answer as a decimal rounded to 4 decimal places.)

	Reward-to-Volatility Ratio
Your risky portfolio
Client’s overall portfolio

Solutions

Expert Solution

Weight of Risky portfolio = 0.8

Weight of T bill = 0.2

Expected return of Client portfolio = Weight of Risky portfolio*Expected return of Risky portfolio+Weight of T bill*Expected return of T bill

Expected return of Client portfolio = 12*0.8+5*0.2

Expected return of Client portfolio = 10.6

Weight of Risky portfolio = 0.8

Weight of T bill = 0.2

Std dev of Client portfolio = Weight of Risky portfolio*Std dev of Risky portfolio+Weight of T bill*Std dev of T bill

Std dev of Client portfolio = 44*0.8+0*0.2

Std dev of Client portfolio = 35.2

Weight of T bill = 20%

Weight of stock A = Weight of risky portfolio*weight of stock A in risky portfolio=0.8*0.28=22.4%

Weight of stock B = Weight of risky portfolio*weight of stock B in risky portfolio=0.8*0.37=29.6%

Weight of stock C = Weight of risky portfolio*weight of stock C in risky portfolio=0.8*0.35=28%

Risky portfolio

Sharpe ratio(reward to variability)
=(Return-risk free rate)/std dev
=(12-5)/44
=0.1591

Client portfolio

Sharpe ratio(reward to variability)
=(Return-risk free rate)/std dev
=(10.6-5)/35.2
=0.1591

jeff jeffy answered 1 month ago

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