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You manage an equity fund with an expected risk premium of 10% and an expected standard deviation of 15%. The rate on Treasury bills (risk-free rate) is 5%. Your client chooses to invest $60,000 of her portfolio in your equity fund and $40,000 in a T-bill money market fund.

Required:
What is the expected return and standard deviation of return on your client's portfolio?

Sagot :

Shahzaibfarazidn

Answer:

Portfolio expected return = 8%

Portfolio SD = 9%

Explanation:

Portfolio return is a function of the weighted average return of each stock or asset invested in the portfolio. The mean return on portfolio can be calculated using the following formula,

Portfolio return = wA * rA  +  wB * rB  +  wN * rN

Where,

  • w represents the weight of each stock or asset in the portfolio
  • r represents the return of each stock or asset in the portfolio

Total investment in portfolio = 60000 + 40000 = 100000

Portfolio return = 60000/100000  *  10%  +  40000/100000  *  5%

Portfolio return = 8%

The standard deviation of a portfolio containing one risky and one risk-free asset is calculated by multiplying the standard deviation of the risky asset by its weight in the portfolio. So, portfolio standard deviation will be,

Portfolio SD = 60000/100000  *  15%

Portfolio SD = 9%

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