Question

You managed a risky portfolio with an expected rate of return of 28% and a standard deviation of 78%. The T-bill rate is 5%. Your client stipulates that the complete portfolio's standard deviation should be less than 12%. What proportion of your client's total investment should be invested in the risky portfolio

Answer 1

Portfolio standard deviation = Weight in Risky portfolio * Standard deviation of Risky portfolio

12% = Weight in risky Portfolio * 78%

Weight in risky Portfolio = 12% / 78%

Weight in risky Portfolio = 0.1538

Weight in risky Portfolio = 15.38%

Stock Weight Return Weighted Return

Risky portfolio 0.1538 28.00% 4.31%

Risk free Asset 0.8462 5.00% 4.23%

Portfolio Return 8.54%