Answered

Discover a world of knowledge at Westonci.ca, where experts and enthusiasts come together to answer your questions. Explore comprehensive solutions to your questions from a wide range of professionals on our user-friendly platform. Our platform offers a seamless experience for finding reliable answers from a network of knowledgeable professionals.

You manage an equity fund with an expected risk premium of 10% and an expected standard deviation of 15%. The rate on Treasury bills (risk-free rate) is 5%. Your client chooses to invest $60,000 of her portfolio in your equity fund and $40,000 in a T-bill money market fund.

Required:
What is the expected return and standard deviation of return on your client's portfolio?

Sagot :

Shahzaibfaraz

Answer:

Portfolio expected return = 8%

Portfolio SD = 9%

Explanation:

Portfolio return is a function of the weighted average return of each stock or asset invested in the portfolio. The mean return on portfolio can be calculated using the following formula,

Portfolio return = wA * rA  +  wB * rB  +  wN * rN

Where,

  • w represents the weight of each stock or asset in the portfolio
  • r represents the return of each stock or asset in the portfolio

Total investment in portfolio = 60000 + 40000 = 100000

Portfolio return = 60000/100000  *  10%  +  40000/100000  *  5%

Portfolio return = 8%

The standard deviation of a portfolio containing one risky and one risk-free asset is calculated by multiplying the standard deviation of the risky asset by its weight in the portfolio. So, portfolio standard deviation will be,

Portfolio SD = 60000/100000  *  15%

Portfolio SD = 9%

Thank you for your visit. We're committed to providing you with the best information available. Return anytime for more. We hope our answers were useful. Return anytime for more information and answers to any other questions you have. Westonci.ca is your go-to source for reliable answers. Return soon for more expert insights.