Question

 Barry Swifter is 60 years of age and considering retirement. ​ Barry's retirement portfolio currently is valued at​ $750,000 and is allocated in Treasury​ bills, an​ S&P 500 index​ fund, and an emerging market fund as​ follows:

	Expected Return	​ $ Value
Treasury bills	3.1%	94,000
​ S&P 500 Index Fund	8.4%	498,000
Emerging Market Fund	12.8%	158,000

a.  Based on the current portfolio composition and the given expected rates of​ return, the expected rate of return for​ Barry's portfolio is

( ) ​%.

​(Round to two decimal​ places.)

b.  If Barry moves all his money out of emerging market funds and puts it in Treasury​ bills, the expected rate of return for his portfolio is

( ) %

​(Round to two decimal​ places.)

Answer 1

Solution :-

a.

For calculation of expected return we will calculate weighted average return of given portfolio

Expected Return of portfolio = [{(Expected return of treasury bill X value of treasury bill) + (Expected return of S&P Index 500 X value of S&P Index 500) + (Expected return of Emerging Market Fund X value of Emerging Market Fund)} / Value of portfolio] X 100

Therefore,

Expected Return = [{(3.1% X 94,000) + (8.4% X 498000) + (12.8% X 158000)} / 750000] X 100

Expected Return = {(2914 + 41832 + 20224) / 750000} X 100

Hence,

Expected Return = 8.66%

b.

When we moves fund from Emerging market fund to Treasury bill then value of treasury bill fund is increased by 158000

Expected Return of portfolio = [{(Expected return of treasury bill X value of treasury bill) + (Expected return of S&P Index 500 X value of S&P Index 500)} / Value of portfolio] X 100

Therefore,

Expected Return = [{(3.1% X 252000) + (8.4% X 498000)} / 750000] X 100

Expected Return = {(7812 + 41832) / 750000} X 100

Hence,

Expected Return = 6.62%

Conclusion : Expected Return has been decreased while fund moves from emerging fund to treasury bills because expected return of treasury bill is much lower than the expected return of emerging fund. Therefore, expected return of whole portfolio will decrease.