Question

A risky portfolio has an expected return of 12% and standared deviation of 25% given a risk free rate of 3% what is the expected return on the complete portfolio for a client with a risk aversion of 4?

Answer 1

Risk aversion factor (A)=   4
Expected return of Risky portfolio=   12%
  
Risk free rate=   3%
standard deviation=   25%
Formula for investment in risky portfolio  
Weight of ORP = ( Expected retun of Risky portfolio - Risk free rate)/(risk aversion coefficiennt * Std. dev. of ORP ^2)  
  
  
(12%-3%)/(4*(25%)^2)  
0.36   or 36%
  
So portfolio Weight invested in Risky portfolio=   36.00%
Portfolio Weight inRisk free = 1-36% =64%

  

Expected return of complete portfolio = (weight of risky portolio * expected return) + (weight of risk free * rate of return)

=(36%*12%)+(64%*3%)

= 0.0624 or 6.24%

So expected Return of complete portfolio is 6.24%