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%.
a. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. What is the expected return and standard deviation of your client's portfolio?
b. Suppose your risky portfolio includes the following investments in the given proportions:
Stock A 27%
Stock B 33%
Stock C 40%
What are the investment proportions of your client's overall portfolio, including the position in T-bills?
c. What is the reward-to-volatility 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?