Chapter 6, Problem 18PS

a

Summary Introduction

Adequate information:

Expected rate of return of risky asset =18%

Standard deviation of the risky asset=28%

Complete portfolio’s standard deviation will not increase beyond 18%.

T-bill rate is 8%

Client decides to invest in your portfolio in the proportion Y

Overall portfolio’s expected rate of return =16%

To compute: The proportion of Y

Introduction:

Risky Portfolio: When there is a chance of non-accomplishment of financial objectives of an investment in a unit or combination of assets, it is termed as risky portfolio. A higher risk always carries higher return.

b

Summary Introduction

Adequate information:

Expected rate of return of risky asset =18%

Standard deviation of the risky asset=28%

T-bill rate is 8%

Client decides to invest in your portfolio in the proportion Y

Overall portfolio’s expected rate of return =16%

Complete portfolio’s standard deviation will not increase beyond 18%.

To compute: The expected rate of return on the complete portfolio.

Introduction:

Expected return of the portfolio: It is also called as weighted average expected return. So, it is must to consider both the weights and the expected return of both stocks.