SO I HAVE THE ANSWER FOR PART A) 14.20%, BUT I DON\'T KNOW THE DIFFERENCE BETWEE

Question

SO I HAVE THE ANSWER FOR PART A) 14.20%, BUT I DON'T KNOW THE DIFFERENCE BETWEEN THE ANSWERS FOR QUESTIONS 3B) AND 3C). ANSWER BOTH PARTS FOR FULL POINTS, AND EXPLAIN YOUR ANSWER. THANK YOU!

There is way too much drama in your family and you decide that you will focus on wealth management for rich clients instead. You are managing another risky portfolio, which has the following stock holdings: The risk-free rate is 4%. Calculate the expected return for this portfolio. Your first client has devoted her total investment budget to pay for college for her kids. After many discussions with you to figure out her risk tolerance, number of kids and the kind of likely colleges she might pay for, she decides that an expected return in her overall portfolio of 8% should be sufficient to cover the likely college costs. She would like to achieve this by putting some of her money into your risky fund and the remainder in T-bills. What proportion should she invest in the risky portfolio and what proportion in the risk-free asset? What are the investment proportions of your client's overall portfolio, including the position in T-bills?

Explanation / Answer

3B)

as ans for 3A is 14.2%

so 8% = w1*14.2%+w2*(4%)   as risk free rate or T-bill rate =4%

and also we know w1+w2 =1

solving above equations , we get w1=39.22% and w2 =60.78%

so She should invest in risky portfolio(w1) =39.22% and in risk free asset(w2)=60.78%

3C) In this part they are asking that investment proportion in each stock is needed as they require over all portfolio

so in stock A =30% of (39.22) =11.764% (As stock A ,B and C are in risky portfolio whose proportion is 39.22%)

and in stock B = 60% of (39.22%) =23.529%

and in stock C =10% *39.22% =3.922%

so over all proprtion is stock A-11.764% ,stockB- 23.529% ,stock c -3.922% and T-bill -60.78%

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