Question

You manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate is 8%. Your client's degree of risk aversion is A= 3.5, assuming a utility function U=EU - VAо. 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.) Investment proportion y b. What is 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 return Standard deviation

Answer 1

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ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Dr General Calibri -11AA = = = BIU - D A Font E Copy Paste Format Painter Clipboard Wrap Text Merge & Center - $ % , :.: Insert Delete Format Conditional Format Cell Formatting as Table Styles Styles Σ AutoSum : A Fill Sort & Clear Filter Editing Find & Select Alignment Number Cells LP45 LO LQ LR LS LT LU LV LW LX 44 45 E(r ) = rf= A= 6= 18% 8% 3.5 RISK AVERSION 28% y = (E(r) - rf)/(A*(62)) (0.18 -0.08)/3.5(0.282) = 0.364431487 INVESTMENT PROPORTION y = 36.44% EXPECTED RETURN =Rp = rf + (E(r ) - rf)*(y) EXPECTED RETURN = 8% + (18%-8%)*(0.3644) = Rp 11.64% 58 59 60 SDp STANDARD DEVIATION (SDp) = y*6 = 0.3644 * 28% = 10.20% K M Convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio KE CAPM UTILITY, SHARPE, beta ferences: AG470 Red cap stru WACC RESI el 200 140% 0 + * 410 ENG 30-10-2019 DO 90