Your uncle's trade dealer wants to make some profit out of your uncle's investment. He sells...
Your uncle's trade dealer wants to make some profit out of your uncle's investment. He sells the T-bills and invests in an index fund that represents all U.S. common stocks. The idea is to take advantage of the higher average returns of the index fund shares and sell them back after a year to buy back the original quantity of T-bills, as if he had held on the treasury bills during the year. The return (R) from this strategy is thus given by: R=Y-X.
Returns X and Y have the following characteristics:
- Annual return on T-bills (X): mean= 5.0%, standard deviation=2.6%
- Annual return on fund index (Y): mean=13.2%, standard deviation=12.9%
- Correlation between X and Y: correlation (rho) = -0.11
What is the standard deviation of the return R? Express your answer in percentage and include 1 digit of precision after the decimal.
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Your uncle's trade dealer wants to make some profit out of your
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