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Unformatted text preview: Bodie, Kane, Marcus, Perrakis and Ryan, Chapter 6 Answers to Selected Problems You manage a risky portfolio with an expected rate of return of 18 percent and a standard deviation of 28 percent. The T-bill rate is 8 percent. 1. Your client chooses to invest 70 percent of a portfolio in your fund and 30 percent in a T-bill money market fund. What is the expected value and standard deviation of the rate of return on your client’s portfolio? Answer: Let c denote the client’s portfolio, let f denote the money-market fund and let p denote the risky portfolio. Then E [ r c ] = E [ . 7 r p + . 3 r f ] = . 7 E [ r p ] + . 3 r f = . 7 × . 18 + . 3 × . 08 = 15% . Since σ f = 0, the standard deviation of the client’s portfolio is given by σ c = . 7 σ p = . 7 × . 28 = 19 . 6% . 2. Suppose that your risky portfolio included the following investments in the given por- portions: Stock A : 27 percent Stock B : 33 percent Stock C : 40 percent What are the investment proportions of your client’s overall portfolio, including the 1 position in T-bills?position in T-bills?...
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- Spring '12
- Standard Deviation