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You manage a risky mutual fund with expected rate of return of 18% and standard deviation...

You manage a risky mutual fund with expected rate of return of 18% and standard deviation of 28%. The T-bill rate is 8%.

  1. What is the slope of the CAL of your risky mutual fund? Show the position of your client on your fund’s CAL.
  2. Suppose that your client decides to invest in your portfolio a proportion ‘y’ of the total investment budget so that the overall portfolio will have an expected rate of return of 16%.
    • What is the proportion y?
    • What are your client’s investment proportions in your three stocks and the T-bill fund?
    • What is the standard deviation of the rate of return on your client’s portfolio?
  3. Suppose that your client prefers to invest in your fund a proportion y that maximizes the expected return on the complete portfolio subject to the constraint that the complete portfolio’s standard deviation will not exceed 18%.
    • What is the investment proportion, y?
    • What is the expected rate of return on the complete portfolio?
  4. Your client’s degree of risk aversion is A = 3.5.
    • What proportion, y, of the total investment should be invested in your fund?
    • What is the expected value and standard deviation of the rate of return on your client’s optimized portfolio?

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jeff jeffy answered 1 year ago
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