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Assume that you manage a risky portfolio with an expected rate of return of 15% and a standard deviation of 31%. The T-bill rate is 5%.

Stock A 26%
Stock B 33%
Stock C 41%

A client prefers to invest in your portfolio a proportion (y) that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio's standard deviation will not exceed 20%.

a. What is the investment proportion, y?
b. What is the expected rate of return on the overall portfolio?

Respuesta :

ogorwyne

Answer:

a. 64.52%

b. 11.45 percent

Explanation:

we solve for the standard deviation of the full portfolio. the standard deviation will not be more than 20 percent.

this is given as

y * 31 percent

20% = y * 0.31

0.20 = 0.31y

y = 0.20/0.31

y = 0.64516

= 64.52 percent

b. The expected rate of return

= (1- 64.52%)*0.05+0.6452*15percent

= 0.3548*0.05+0.09678

= 0.11452

= 11.45 percent

this is the expected rate of return on the overall portfolio

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