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09-CALII

# 09-CALII - Capital Allocation Line Part II Improving...

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Capital Allocation Line Part II

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Improving Client’s Position 2 A client asks your advice about her investments. She has invested \$70,000 in a Mosaic mutual fund and \$10,000 in risk-free bonds. She asks you whether she should re-allocate her assets. Mosaic fund Expected return: 15% Standard deviation: 30%. Vanguard Fund Expected return: 12% Standard deviation: 16%. Assume now that borrowing and lending rates differ. In particular, the borrowing rate equals 11% and the lending rate equals 7%.
Improving Client’s Position 3 Question 1: What is the expected return and the standard deviation of her current portfolio? The expected return is: E(r)=(7/8)*(0.15) + (1/8)*(0.07) = 14% (stat rule 1) The standard deviation is: Stdev(r)=(7/8)*0.30 = 0.2625 (stat rule 2)

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Rates 4 Question 2 - Assuming now that borrowing and lending rates differ: Can you find a portfolio with same total risk but higher expected return? In this case, we can’t simply turn to the Sharpe Ratio,
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09-CALII - Capital Allocation Line Part II Improving...

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