Q18I.

Expert-verifiedFound in: Page 143

Book edition
9th

Author(s)
Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus

Pages
748 pages

ISBN
9780078034695

**You manage an equity fund with an expected risk premium of 10% and a standard deviation of 14%. The rate on Treasury bills is 6%. Your client chooses to invest $60,000 of her portfolio in your equity fund and $40,000 in a T-bill money market fund. What is the expected return and standard deviation of return on your client’s portfolio?**

Expected return = 12%

Standard deviation of return =.8.4%

Expected risk premium = 10%

Standard deviation = 14%

Rate on treasury bills = 6%

Equity fund investment = $60,000

T-bill money market fund investment = $40,000

Expected return for your fund = T-bill rate + risk premium = 6% + 10% = 16%

Expected return of client’s overall portfolio = (0.6 x 16%) + (0.4 x 6%) = 12%

Standard deviation of client’s overall portfolio = 0.6 x 14% = 8.4%

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