Question
In: Finance
You manage a risky portfolio with an expected rate of return of 17% and a standard...
You manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 28%. The T-bill rate is 7%. Your client’s degree of risk aversion is A = 2.0, assuming a utility function U = E(r) − ½Aσ².
a. What proportion, y, of the total investment should be invested in your fund? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. What are the expected value and standard deviation of the rate of return on your client’s optimized portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Solutions
Expert Solution
a. What proportion, y, of the total investment should be invested in your fund? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Proportion of y = (Expected return of risky portfolio - risk free rate) / (Risk Aversion * variance)
Proportion of y = (17% - 7%) / (2.0 * 0.28^2)
Proportion of y = 10% / (2.0 * 0.0784)
Proportion of y = 63.78%
b. What are the expected value and standard deviation of the rate of return on your client’s optimized portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Expected Value = risk free rate + Proportion of Y * (Expected return of Risky portfolio - risk free rate)
Expected Value = 7% + 63.78% * 10%
Expected Value = 13.38%
Standard Deviation = proportion of Y * standard deviation
Standard Deviation = 63.78% * 28%
Standard Deviation = 17.86%
jeff jeffy answered 1 year agoRelated Solutions
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