J.J. Fund Inc. manages a risky Tech portfolio with an expected return of 16% and a standard deviation of 25%. Currently the T-bill pays 6% return.
a) R.S. is an investor who would like to invest $6,000 in this fund (60%) and $4,000 in a T-bill money market fund (40%). What is the expected return and standard deviation of R.S.'s portfolio?
b) Tech portfolio is composed of four technology stocks: 20% Apple; 30% Google; 40% HP; and 10% Intel. What are the investment proportions and dollar amount of R.S. overall portfolio, including the position in the T-bills?
c) Calculate the reward to variability ratio (Sharpe ratio) of Fund's Tech portfolio and R.S.'s portfolio. What does this ratio mean in the context of portfolio analysis?Would you prefer it to be larger or lower? Why?
d) Draw the CAL (The Capital Allocation Line) of your Tech portfolio on an expected return -standard deviation diagram. What is the slope of the CAL? Show the position of R.S.'s portfolio on your fund's CAL. Can you tell whether R.S. is a borrower or a lender? Why? What do we mean by being borrower or lender? How does risk-averseness can make one investor to be a lender and another investor to become a borrower?
Please show all calculations.