Question

You manage an equity fund with an expected risk premium of 12.4% and a standard deviation of 38%. The rate on Treasury bills is 5.4%. Your client chooses to invest $120,000 of her portfolio in your equity fund and $80,000 in a T-bill money market fund. What is the expected return and standard deviation of return on your client’s portfolio? (Round your answers to 2 decimal places.)

Answer 1

• The expected return = = 12.84 %.

• The standard deviation = 22.8 %.

Explanation:

On the client's portfolio (total investment = 120 K + 80 K = 200 K,  

• The expected return

                    = (12.4 %risk premium + 5.4 %risk free return) $\times$ (120 K / 200 K) + 5.4 % $\times$ (80 K / 200 K)

                    = 17.8 % $\times$ 0.6 + 5.4 % $\times$ 0.4

                    = 12.84 %.

• The standard deviation would be = 38 % $\times$ 0.6 + 0% $\times$ 0.4

                                                                  = 22.8 %.