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You manage a risky portfolio with an expected return of 12% and a standard deviation of 24%. Assume that you can invest...

You manage a risky portfolio with an expected return of 12% and a standard deviation of 24%. Assume that you can invest and borrow at a risk-free rate of 3%, using T-bills.

a. Draw the Capital Allocation Line (CAL) for this combination of risky portfolio and risk-free asset. What is the Sharpe ratio of the risky portfolio?

b. Your client chooses to invest 50% of their funds into your risky portfolio and 50% risk-free. What is the expected return and standard deviation of the rate of return on their portfolio?

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Answer #1

1.
Sharpe Ratio=(12%-3%)/24%=0.375

2.
Expected return=50%*12%+50%*3%=7.50%
Standard Deviation=50%*24%=12%

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