Question

Your portfolio consists of an index mutual fund which represents the overall market and Treasury bills. The mutual fund has a portfolio weight of 65%. The risk-free rate is 3% and the market risk premium is 7.7%. What is your best estimate for your portfolio's expected rate of return (rounded % to three places after the decimal)

Answer 1

8.01%

Step-by-step explanation:

Expected return on mutual fund = Risk-free rate + Market risk premium*Beta

Expected return on mutual fund = 3% + 7.7%*1

Expected return on mutual fund = 10.70%

Best estimate of the portfolio expected rate of return = Weight of mutual fund*Expected return on mutual fund + Weight of risk-free Treasury bills*Expected return on risk-free Treasury bills

Best estimate of the portfolio expected rate of return = 65%*10.70 + 35%*3

Best estimate of the portfolio expected rate of return = 0.08005

Best estimate of the portfolio expected rate of return = 8.01%