Question

Assume that you manage a risky portfolio with an expected rate of return of 14% and a standard deviation of 30%. The T-bill rate is 6%. Your risky portfolio includes the following investments in the given proportions: Stock A Stock B Stock C 24% 32 44 Your client decides to invest in your risky portfolio a proportion (1) of his total investment budget with the remainder in a T-bill 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 87.5 % b. What are your client's investment proportions in your three stocks and in T-bills? (Round your intermediate calculations and final answers to 1 decimal places.) Security T-Bills Stock A Stock B Stock C Investment Proportions 12.5% 21.0% 28.0% 38.5 %

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

B Risky Portfolio Proportion Stock A Stock B Stock C 24% 32% 44% Expected return of Risky Portfolio Standard deviation of Risky Portfolio 14% 30% Proportion Client Portfolio Risky Portfolio T-bills (1-y) 15 16 T-bills rate Expected return of Client Portfolio 13% 17 18 Thus, 19 a. Proportion y (Risky Portfolio) 87.5% b. Proportion Client Portfolio T-bills Stock A Stock B Stock C 12.5% 21.0% 28.0% 38.5% 25 26

Cell reference -

Risky Portfolio Proportion Stock A Stock B Stock C 0.24 0.32 0.44 0.14 Expected return of Risky Portfolio Standard deviation of Risky Portfolio Proportion Client Portfolio Risky Portfolio T-bills (1-y) 0.06 T-bills rate Expected return of Client Portfolio 0.1 Thus, Proportion y (Risky Portfolio) a. =(C16-C15)/(07-C15) Client Portfolio T-bills Stock A Stock B Stock C Proportion =1-C19 =$C$19*C3 =$C$19*04 =$C$19*C5

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