You manage a risky portfolio with an expected rate of return of 19% and a standa

Question

You manage a risky portfolio with an expected rate of return of 19% and a standard deviation of 33%. The T-bill rate is 7%. Suppose that your client prefers to invest in your fund a proportion y that maximizes the expected return on the complete portfolio subject to the constraint that the complete portfolio’s standard deviation will not exceed 19%.

a. What is the investment proportion, y? (Round your answer to 2 decimal places.)

b. What is the expected rate of return on the complete portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

a. y*0.33 = 0.19

y = 0.58%

b. expected rate of return on the complete portfolio = 0.5758*19% + 0.4242*7%

expected rate of return on the complete portfolio = 13.91%

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