Question

Problem 6-15 You manage a risky portfolio with an expected rate of return of 22% and a standard deviation of 34%. The T-bill rate is 6%. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. What is the reward-to-volatility (Sharpe) ratio (S) of your risky portfolio? Your client's? (Do not round intermediate calculations. Round your answers to 4 decimal places.) Your reward-to-volatility ratio Client's reward-to-volatility ratio

Answer 1

Your Reward To Volatility ratio =(Expected Return-Risk Free Rate)/Standard Deviation =(22%-6%)/34% =0.4706

Expected Return of client =70%*22%+30%*6% =17.20%
Standard Deviation of Risk free rate =0
Standard Deviation of Portfolio =Weight of fund*Standard Deviation of fund =70%*34%=23.80%
Client's Reward To Volatility ratio =(Expected Return-Risk Free Rate)/Standard Deviation =(17.2%-6%)/23.80% =0.4706