Chapter 5, Problem 12PS

For Problems 12-16, assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. The T-bill rate is 7%.

12. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. (LO 5-3)
a. What is the expected return and standard deviation of your client’s portfolio?
b. Suppose your risk portfolio includes the following investments in the given proportions:
Stock A 27%
Stock B 33
Stock C 40
What are the investment proportions of each slock in your client’s overall proportion including the position in T-bills’?
c. What is the Sharpe ratio (S) of your risky portfolio and your client’s overall portfolio?
d. Draw the CAL of your portfolio on an expected return/standard deviation diagram. What is the slope of the CAL? Show the position of your client on your fund’s CAL.