A.You manage an equity fund with an expected risk premium of 13.8% and a standar

Question

A.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 reward-to-volatility ratio for the equity fund? (Round your answer to 4 decimal places.)

Bonus: You invested in a 3-month certificate of deposit at your bank. Your investment was $1,768, and at the end of the term you will receive $1,962.

What is the holding period return (HPR) on your investment? (Round your answer to 2 decimal places.)

What is the annual percentage rate (APR)? (Round your answer to 2 decimal places.)

What is the effective annual rate (EAR)? (Round your answer to 2 decimal places.)

Explanation / Answer

Expected return = 0.8*13.8 + 0.2*3.6% = 11.76%

standard dev = 0.8*52% = 41.60%

reward to vol = 11.76/41.60 = 0.2827%

Bonus:

HPR = 1962/1768 - 1 = 10.97%

APR = 10.97% * 4 = 43.89%

EAR = (1 + 10.97%)^4 - 1 = 51.66%

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