Question

You manage an equity fund with an expected risk premium of 13.8% and a standard deviation of 52%. The rate on Treasury bills is 3.6%. Your client chooses to invest $120,000 of her portfolio in your equity fund and $30,000 in a T-bill money market fund. What is the expected return and standard deviation of return on your client’s portfolio?

Answer 1

Answer and Explanation:

Expected return on Equity fund = Treasury bills rate + Expected risk premium = 13.8% + 3.6%

= 17.4%

Expected return portfolio = 80% of Expected return on Equity fund + 20% of Treasury bills rate

= (17.4% x 80%) + (3.6% x 20%)

= 14.64%

Standard deviation portfolio = 80% of standard deviation

80% × 52% = 41.60%

Note: Assume 80% Portfolio in fund and 20% in Treasury bills.