You manage a risky portfolio with expected rate of return of 18% and standard deviation of 32%. The T-bill rate is 4%.
1. Your client Benedict chooses to invest 55% of a portfolio in your fund and 45% in a T-bill money market fund. What is the expected value and standard deviation of the rate of return on his portfolio?
2. Suppose that your risky portfolio includes the following investments in the given proportions: Stock A: 33% Stock B: 39% Stock C: 28% What are the investment proportions of Benedict’s overall portfolio, including the position in T-bills?
3. What is the Sharpe ratio of your risky portfolio? Benedict’s?
4. Draw the Capital Allocation Line (CAL) of your portfolio on an expected return-standard deviation diagram. What is the slope of the CAL? Show Benedict’s position on your fund’s CAL.
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