Question

The following data are available relating to the performance of Seminole Fund and the market portfolio: Seminole Market Portfolio Average return 18 % 14 % Standard deviations of returns 30 % 22 % Beta 1.4 1.0 Residual standard deviation 4.0 % 0.0 %The risk-free return during the sample period was 6%. If you wanted to evaluate the Seminole Fund using the M 2 measure, what percent of the adjusted portfolio would need to be invested in T-Bills? 50% 8% 27% 36% -36% (borrow)

Answer 1

Answer:

27%

Explanation:

Given the following sorted data from the question:  

                                              Seminole         Market Portfolio

Average Return                              18%                         14%

Standard Deviation of Returns      30%                        22%

Beta                                                  1.4                            1.0

Residual Standard Deviation         4.0%                        0.0%  

Therefore, we have:

Percentage of investment in Seminole Fund = Market portfolio SD of returns / Seminole SD of returns = 22% / 30% = 73.33%, or 73%

Percentage of investment in T-Bills = 100% - 73% = 27%

Therefore, the percentage of the adjusted portfolio that would need to be invested in T-Bills is 27%.