Assume that you manage a risky portfolio with an expected rate of return of 12% and a standard deviation of 39%. The T-bill rate is 6%. Your risky portfolio includes the following investments in the given proportions: Stock A 23% Stock B 32% Stock C 45% Your client decides to invest in your risky portfolio with a proportion (y) of his investment budget with the rest in a T-bill (MMF) money market fund so that the overall portfolio will have an expected return of 9%. What is the proportion y

Question

Rishi Fitzgerald

Business

2 August, 23:29

Assume that you manage a risky portfolio with an expected rate of return of 12% and a standard deviation of 39%. The T-bill rate is 6%. Your risky portfolio includes the following investments in the given proportions: Stock A 23% Stock B 32% Stock C 45% Your client decides to invest in your risky portfolio with a proportion (y) of his investment budget with the rest in a T-bill (MMF) money market fund so that the overall portfolio will have an expected return of 9%. What is the proportion y

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Damian Acevedo · Answer 1

y = 50 %

Explanation:

As per the data given in the question, computation are as follows:

Expected return = y * expected rate of return for portfolio + (1 - y) * rate of T-bills

By putting the value from the given data in the above formula, we get

0.09 = y*0.12 + (1 - y) * 0.06

0.09 = 0.12y + 0.06 - 0.06y

0.03 = 0.06 y

y = 0.50

= 50%