You manage an equity fund with an expected risk premium of 13.4% and a standard

Question

You manage an equity fund with an expected risk premium of 13.4% and a standard deviation of 48%. The rate on Treasury bills is 5.6%. Your client chooses to invest $105,000 of her portfolio in your equity fund and $45,000 in a T-bill money market fund. What is the expected return and standard deviation of return on your client’s portfolio? (Round your answers to 2 decimal places.)

You manage an equity fund with an expected risk premium of 13.4% and a standard deviation of 48%. The rate on Treasury bills is 5.6%. Your client chooses to invest $105,000 of her portfolio in your equity fund and $45,000 in a T-bill money market fund. What is the expected return and standard deviation of return on your client’s portfolio? (Round your answers to 2 decimal places.)

Explanation / Answer

Answer: The expected return and standard deviation of return on your client’s portfolio are as follows:

On the client's portfolio (total investment = 105000+ 45000 = 150000),
The expected return = (13.4%risk premium + 5.6%risk free return) * (105K / 150K) + 5.6% * (45K /150K)

= 16% * 0.70 + 5.6% * 0.30 = 11.2%+1.68%=12.88%

The standard deviation would be = 48% * 0.70 + 0% * 0.30 = 33.6%

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