You manage three funds: a Stock Fund (r 15%, sigma 32%), a Bond Fund (r 9%, sigma 23%) and a T-Bill Fund (risk-free rate 5.5%). The correlation coefficient between the two risky funds is 0.15. The Optimal Risky Portfolio has an expected return of 12.88% and a sigma of 23.34%. You have a client who would like to have a return of 11% for her Total Portfolio. You recommend a mix of the Optimal Risky Portfolio and the T-Bill Fund, but she wonders if she could also achieve that return only using your two risky funds. How much additional Volatility will she have to endure if she avoids your recommendation?
You manage three funds: a Stock Fund (r 15%, sigma 32%), a Bond Fund (r 9%, sigma 23%) and a T-Bill Fund (risk-free rate 5.5%). The correlation coefficient between the two risky funds is 0.15. The Optimal Risky Portfolio has an expected return of 12.88% and a sigma of 23.34%. You have a client who would like to have a return of 11% for her Total Portfolio. You recommend a mix of the Optimal Risky Portfolio and the T-Bill Fund, but she wonders if she could also achieve that return only using your two risky funds. How much additional Volatility will she have to endure if she avoids your recommendation?
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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You manage three funds: a Stock Fund (r 15%, sigma 32%), a Bond Fund (r 9%, sigma 23%) and a T-Bill Fund (risk-free rate 5.5%). The correlation coefficient between the two risky funds is 0.15. The Optimal Risky Portfolio has an expected return of 12.88% and a sigma of 23.34%. You have a client who would like to have a return of 11% for her Total Portfolio. You recommend a mix of the Optimal Risky Portfolio and the T-Bill Fund, but she wonders if she could also achieve that return only using your two risky funds. How much additional Volatility will she have to endure if she avoids your recommendation?
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