Consider the following information about a risky portfolio that you manage, and a risk-free asset: E(rP ) = 11%, σP = 15%, rf = 5%. a) Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 8%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset? b) What will be the standard deviation of the rate of return on her portfolio? c) Another client wants the highest return possible subject to the constraint that you limit his standard deviation to be no more than 12%. Which client is more risk averse?
Consider the following information about a risky portfolio that you manage, and a risk-free asset: E(rP ) = 11%, σP = 15%, rf = 5%. a) Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 8%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset? b) What will be the standard deviation of the rate of return on her portfolio? c) Another client wants the highest return possible subject to the constraint that you limit his standard deviation to be no more than 12%. Which client is more risk averse?
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 5P
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Question
Consider the following information about a risky portfolio that you
manage, and a risk-free asset: E(rP ) = 11%, σP = 15%, rf = 5%.
a) Your client wants to invest a proportion of her total investment budget in your risky
fund to provide an expected
8%. What proportion should she invest in the risky portfolio, P, and what proportion
in the risk-free asset?
b) What will be the standard deviation of the rate of return on her portfolio?
c) Another client wants the highest return possible subject to the constraint that you limit
his standard deviation to be no more than 12%. Which client is more risk averse?
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