Question

Problem 5-13 Assume that you manage a risky portfolio with an expected rate of return of 15% and a standard deviation of 40%. The T-bill rate is 5% Your risky portfolio includes the following investments in the given proportions: Stock A Stock B Stock Your client decides to invest in your risky portfolio a proportion of his total investment budget with the remainder in a T-bil money market fund so that his overall portfolio will have an expected rate of return of 13% a. What is the proportion y? (Round your answer to 1 decimal places.) Proportion y b. What are your client's investment proportions in your three stocks and in T-bilis? (Round your intermediate calculations and final < Prey Sot 5 ND ere to search

Answer 1

1.

Mean return on portfolio = Rf + (Rp - Rf) * y

Mean return on portfolio = 5% + (15%-5%)*y

Mean return on portfolio = 5%+10%y

If the mean of the portfolio is 13%, then y is:

13% = 5%+10%y

8% = 10%y

y = 0.8

Thus, the investment of 80% should be in risky portfolio and remaining 20% in treasury bills.

b.

Investment proportions:

T-bills = 20%

Stock A = 24% * 0.8 = 19.2%

Stock B = 33% * 0.8 = 26.4%

Stock C = 43% * 0.8 = 34.4%