Problem 1: Assume that your risky portfolio has an expected rate of return of 20% with a standard deviation of 36%. For your investment horizon, the appropriate T-bill rate is 5%. Your risky portfolio includes the following investments in the given proportions:
Stock A 35 percent
Stock B 36 percent
Stock C 29 percent
Your client chooses to invest 60% of her portfolio in your fund (risky portfolio) and 40% in a T-bill money market fund promising a 5% return.
a) What is the expected rate of return and the standard deviation of the client’s portfolio?
b) What are the investment proportions of your client’s overall portfolio, including the position in T-bills?
c) What is the reward-to-volatility ratio of your risky portfolio? Of your client’s portfolio?
d) Draw the CAL of your portfolio on an expected return-standard deviation diagram. What is the slope of the CAL? Show the position of your client on your fund’s CAL.