Question

Assume that you manage a risky portfolio with an expected rate of return of 16% and a standard deviation of 45%. The T-bill rate is 6%. Your risky portfolio includes the following investments in the given proportions: Stock A 29 % Stock B 38 Stock C 33 Your client decides to invest in your risky portfolio a proportion (y) of his total investment budget with the remainder in a T-bill money market fund so that his overall portfolio will have an expected rate of return of 14%. a. What is the proportion y? (Round your answer to 1 decimal places.)

Answer 1

Answer:

80%

Explanation:

In order to calculate this, we use the portfolio expected rate of return (PERR) as follows:

PERR = Rf + (Rp - Rf)y …………………………………………….. (1)

Where;

PERR = Portfolio expected rate of return = 14%, 0.14

Rf = T-bill rate = 6%, or 0.06

Rp = Expected rate of return = 16%, 0.16

Substituting the values into equation (1), we have:

0.14 = 0.06 + (0.16 – 0.06)y

0.14 – 0.06 = 0.10y

y = 0.08/0.10 = 0.80, or 80%

Therefore, the proportion y is 80%