1. ) You estimate that a passive portfolio, that is, one invested in a risky por

Question

1. ) You estimate that a passive portfolio, that is, one invested in a risky portfolio that mimics the S&P 500 stock index (passive portfolio), yields an expected rate of return of 13% with a standard deviation of 25%. You manage an active portfolio with expected return 18% and standard deviation 28%. The risk-free rate is 8%.

Your client ponders whether to switch the 70% that is invested in your fund to the passive portfolio and keep the 30% in the risk-free asset. What is the expected rate of return of the complete portfolio (70% in risky portfolio and 30% in risk free portfolio) after the switch?

Please round your answer to the fourth decimal: 0.0000

2.)  

You estimate that a passive portfolio, that is, one invested in a risky portfolio that mimics the S&P 500 stock index (passive portfolio), yields an expected rate of return of 13% with a standard deviation of 25%. You manage an active portfolio with expected return 18% and standard deviation 28%. The risk-free rate is 8%.

Your client ponders whether to switch the 70% that is invested in your fund to the passive portfolio and keep the 30% in the risk-free asset. What is the standard deviation of the complete portfolio (70% in risky portfolio and 30% in risk-free portfolio) after the switch?

Please round your answer to the fourth decimal: 0.0000

You estimate that a passive portfolio, that is, one invested in a risky portfolio that mimics the S&P 500 stock index (passive portfolio), yields an expected rate of return of 13% with a standard deviation of 25%. You manage an active portfolio with expected return 18% and standard deviation 28%. The risk-free rate is 8%.

Your client ponders whether to switch the 70% that is invested in your fund to the passive portfolio and keep the 30% in the risk-free asset. What is the standard deviation of the complete portfolio (70% in risky portfolio and 30% in risk-free portfolio) after the switch?

Please round your answer to the fourth decimal: 0.0000

Explanation / Answer

Expected returns of complete portfolio=0.7*13%+0.3*8%

Standard deviaiton of compelyte portoflio=sqrt(weight of passive^2*standard deviaiton of passive^2+weight of risk free^2*standard deviaiton of risk free^2+2*weight of passive*weight of riskfree*Covariance(passive,riskfree))

As riskfree asset has zero standard deviation and zero correlation/covariance with portfolio,
standard deviation of complete portfolio=weight of passive*standard deviaiton of passive
=0.7*25=17.5%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.