Problem 5Assume that you manage a risky portfolio with an expected rate ofreturn of 18% and a standard deviation of 28%. The T-bill rate (risk-free rate) is 7%. Yourclient chooses to invest 70% in the risky portfolio in your fund and 30% in a T-bill moneymarket fund. We assume that investors use mean-variance utility: U = E(r) – 0.5 x Aa?,where E(r) is the expected return, A is the risk aversion coefficient and o? is the variance ofreturns.a) What is the expected value and standard deviation of the rate of return on your client'sportfolio?b) What is the reward-to-volatility ratio (Sharpe ratio) of your risky portfolio? What isthe reward-to-volatility ratio (Sharpe ratio) of your client's risky portfolio? Commenton the relationship between these two Sharpe ratio calculated and explain the intuitionbehind.c) Draw the Capital Allocation Line (CAL) of your portfolio on an expected return-standard deviation diagram. What is the slope of the CAL? Show the position ofyour client on your fund's CAL.

Here, Standard Deviation is 28% Expected Return is 18% Risk Free Rate is 7% Client Investment in…

Problem 5 Assume that you manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate (risk-free rate) is 7%. Your client chooses to invest 70% in the risky portfolio in your fund and 30% in a T-bill money market fund. We assume that investors use mean-variance utility: U = E(r) – 0.5 × Ao², where E(r) is the expected return, A is the risk aversion coefficient and o² is the variance of returns. a) What is the expected value and standard deviation of the rate of return on your elient's portfolio? b) What is the reward-to-volatility ratio (Sharpe ratio) of your risky portfolio? What is the reward-to-volatility ratio (Sharpe ratio) of your client's risky portfolio? Comment on the relationship between these two Sharpe ratio calculated and explain the intuition behind. c) Draw the Capital Allocation Line (CAL) of your portfolio on an expected return- standard deviation diagram. What is the slope of the CAL? Show the position of

Problem 5 Assume that you manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate (risk-free rate) is 7%. Your client chooses to invest 70% in the risky portfolio in your fund and 30% in a T-bill money market fund. We assume that investors use mean-variance utility: U = E(r) – 0.5 × Ao², where E(r) is the expected return, A is the risk aversion coefficient and o² is the variance of returns. a) What is the expected value and standard deviation of the rate of return on your elient's portfolio? b) What is the reward-to-volatility ratio (Sharpe ratio) of your risky portfolio? What is the reward-to-volatility ratio (Sharpe ratio) of your client's risky portfolio? Comment on the relationship between these two Sharpe ratio calculated and explain the intuition behind. c) Draw the Capital Allocation Line (CAL) of your portfolio on an expected return- standard deviation diagram. What is the slope of the CAL? Show the position of

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter8: Risk And Rates Of Return

Section: Chapter Questions

Problem 9PROB

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. Assume that you manage a risky portfolio with an expected rate ofreturn of 18% and a standard deviation of 28%. The T-bill rate (risk-free rate) is 7%. Yourclient chooses to invest 70% in the risky portfolio in your fund and 30% in a T-bill moneymarket fund. We assume that investors use mean-variance utility: U = E(r) − 0.5 × Aσ2,where E(r) is the expected return, A is the risk aversion coefficient and σ2is the variance ofreturns.a) What is the expected value and standard deviation of the rate of return on your client’sportfolio? b) What is the reward-to-volatility ratio (Sharpe ratio) of your risky portfolio? What isthe reward-to-volatility ratio (Sharpe ratio) of your client’s risky portfolio? Commenton the relationship between these two Sharpe ratio calculated and explain the intuitionbehind. c) Draw the Capital Allocation Line (CAL) of your portfolio on an expected returnstandard deviation diagram. What is the slope of the CAL? Show the position ofyour client on your fund’s CAL.…
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