Question

Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. The T-bill rate is 7%. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. What is the expected return and standard deviation of your client's portfolio

Answer 1

• Expected return = 14%

• Standard Deviation = 18.9%

Step-by-step explanation:

Expected Return will be the weighted average of the return from the T-bill and your risky portfolio.

With 70% invested in the risky portfolio and 30% invested in T-bills and a return of 17% from the portfolio and 7% from the T-bills, return is;

= ( 0.7 * 17%) + ( 0.3 * 7%)

= 14%

Standard deviation is a measure of risk and is also a weighted average of the standard deviation of the two vehicles. Bear in mind that T-bills are guaranteed by the US Government and so are considered risk-free.

Standard deviation of the portfolio is;

= (0.7 * 27%) + ( 0.3 * 0)

= 18.9%