a) Suppose you manage a risky portfolio with an expected rate of return of 22% and a standard deviation of 35%. The Treasury bill rate is 6%. Your client chooses to invest 75% of a portfolio in your fund and 25% in a T-bill money market fund.

What is the relationship between reward and volatility ( S ) of your risky portfolio and your client's portfolio?

Your reward to volatility ratio______

Relationship between the reward and the volatility of your clients______

b.) Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 85 years has averaged about 8% more than the yield on Treasury bills and that the standard deviation of the S&P 500 has been approximately 21% per year. Assume that these values are representative of investors' expectations for future performance and that the current rate on Treasury bills is 4%.

Calculate the expected return and variance for portfolios invested in Treasury bills and the S &P 500 Index with weights as follows: 

W -bills	W- index	expected return	Difference
0.2	0.8	0.1040	0.0282	Example
0.4	0.6	?		?
0.0	1.0	?		?
0.8	0.2	?		?
1.0	0.0	?		?
0.6	0.4	?		?

c.) Suppose you manage a risky portfolio with an expected rate of return of 21% and a standard deviation of 33%. The Treasury bill rate is 7%. Your client's degree of risk aversion is A = 2.7, assuming a utility function U = E ( r ) - ½ A σ².

-What proportion, and , of the total investment should be invested in your fund? 

-What is the expected value and standard deviation of the rate of return of your client's optimized portfolio? 

Answer rating: 100% (QA)

a The rewardtovolatility ratio also known as the Sharpe ratio measures the excess return generated per unit of volatility or risk It is calculated by subtracting the riskfree rate of return from the e... View the full answer