Question

1. You manage an equity fund with an expected risk premium of 10% and a standard deviation of 14%. The rate on Treasury bills is 6%. Your client chooses to invest $40,000

of her portfolio in your equity fund and $60,000 in a T-bill money market fund.
a. What is expected rate of return on your portfolio?
b. What is the expected return on your client's portfolio?

Answer 1

The expected rate of return on the portfolio is 7.6%. The expected return on the client's portfolio is $2,680.

Step-by-step explanation:

The expected rate of return on a portfolio is calculated by taking the weighted average of the expected returns of each investment in the portfolio. In this case, the expected rate of return on the equity fund is 10% and the expected rate of return on the T-bill money market fund is 6%. Since the client invested $40,000 in the equity fund and $60,000 in the T-bill money market fund, the weighted average expected rate of return on the portfolio can be calculated as follows:

Expected rate of return = (Weight of equity fund × Expected rate of return of equity fund) + (Weight of T-bill money market fund × Expected rate of return of T-bill money market fund)

= (0.4 × 0.10) + (0.6 × 0.06)

= 0.04 + 0.036

= 0.076 or 7.6%

Therefore, the expected rate of return on the portfolio is 7.6%.

Since the client invested $40,000 in the equity fund and $60,000 in the T-bill money market fund, the expected return on the client's portfolio can be calculated as follows:

Expected return = (Weight of equity fund × Expected rate of return of equity fund × Total investment) + (Weight of T-bill money market fund × Expected rate of return of T-bill money market fund × Total investment)

= (0.4 × 0.10 × $40,000) + (0.6 × 0.06 × $60,000)

= $1,600 + $1,080

= $2,680

Therefore, the expected return on the client's portfolio is $2,680.