You manage a risky fund with expected return of 18% and standard deviation of 28%. The T-Bill rate is 8%. (Please show your work)
a) Your client invests 70% in your risky fund and 30% in T-Bills. What is the expected return and standard deviation of your client’s portfolio?
b) Suppose your risky portfolio includes the following stocks: Stock A: 25%; Stock B: 32%; Stock C: 43%. What are the investment proportions of your client’s portfolio including the position in T-Bills?
c) What is the Sharpe Ratio of your risky fund AND your client’s portfolio?
d) Draw the CAL of your risky fund on the expected return vs. standard deviation diagram and show the position of your client’s portfolio on the graph. What is the slope of the CAL?
e) As you learn more about your client’s investment behavior, you estimate that her degree of risk aversion is A = 3.5. What proportion of your client’s portfolio should now be invested in your risky fund and how much in T-Bills? What is the expected return and risk of this portfolio?