Suppose, a passive portfolio, that is, one invested in a risky portfolio that mimics the DSE Broad Index (DSEX), yields an expected rate of return of 13% with a standard deviation of 25%. As a portfolio manager at LankaBangla Finance Limited, you manage an active portfolio with expected return 18% and standard deviation 28%. The risk-free rate is 8%. Now suppose one of your clients is considering whether to switch the 70% of her capital that is currently invested in your fund to the passive portfolio. (i) If your client does move away from your fund to the passive portfolio, what will be overall expected rate of return and risk of her capital? (ii) If your client wanted to earn the same expected rate of return as in (i), what proportion of her capital would have been invested in your actively managed fund? And in that case, what would be the risk of her complete portfolio? (iii) Based on the information provided here and your answers to (i) and (ii), what would your advice be with regard to your client's decision to the switch?
Suppose, a passive portfolio, that is, one invested in a risky portfolio that mimics the DSE Broad Index (DSEX), yields an expected rate of return of 13% with a standard deviation of 25%. As a portfolio manager at LankaBangla Finance Limited, you manage an active portfolio with expected return 18% and standard deviation 28%. The risk-free rate is 8%. Now suppose one of your clients is considering whether to switch the 70% of her capital that is currently invested in your fund to the passive portfolio. (i) If your client does move away from your fund to the passive portfolio, what will be overall expected rate of return and risk of her capital? (ii) If your client wanted to earn the same expected rate of return as in (i), what proportion of her capital would have been invested in your actively managed fund? And in that case, what would be the risk of her complete portfolio? (iii) Based on the information provided here and your answers to (i) and (ii), what would your advice be with regard to your client's decision to the switch?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Question: 17
Suppose, a passive portfolio, that is, one invested in a risky
portfolio that mimics the DSE Broad Index (DSEX), yields an
expected rate of return of 13% with a standard deviation of 25%.
As a portfolio manager at LankaBangla Finance Limited, you
manage an active portfolio with expected return 18% and
standard deviation 28%. The risk-free rate is 8%. Now suppose
one of your clients is considering whether to switch the 70% of
her capital that is currently invested in your fund to the passive
portfolio.
(i) If your client does move away from your fund to the passive
portfolio, what will be overall expected rate of return and risk of
her capital?
(ii) If your client wanted to earn the same expected rate of return
as in (i), what proportion of her capital would have been
invested in your actively managed fund? And in that case, what
would be the risk of her complete portfolio?
(iii) Based on the information provided here and your answers to
(i) and (ii), what would your advice be with regard to your
client's decision to the switch?
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