Question

Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. The T-bill rate is 7%.
Your risky portfolio includes the following investments in the given proportions:

Stock A 27%
Stock B 33%
Stock C 40%

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 15%.

a. What is the proportion y? (Round your answer to 1 decimal place.)

Proportion y

b. What are your client's investment proportions in your three stocks and the T-bill fund? (Round your

Answer 1

Answer:

Consider the following calculations

Explanation:

a) If the weight of risky portfolio is 'y' then weight of T-bill would be (1-y).

Expected return on clients portfolio = weight of risky portfolio x return on risky portfolio + weight of T-bill x return on T-bill

or, 15% = y x 17% + (1 - y) x 7%

or, y = 0.8

weight of risky portfolio = 0.8, weight of T-bill = 0.2

b)

Security Investment Proportions

T-bill 20% (from part a)

Stock A 80% x 0.27 = 21.6%

Stock B 80% x 0.33 = 26.4%

Stock C 80% x 0.40 = 32%

Total 100%