You are a Morgan Stanley portfolio manager of a risky portfolio with an expected rate of return of 19% and a standard deviation of 28%. The T-bill rate is 7%. Suppose your client decides to invest in your risky portfolio a proportion (y) of his total investment budget so that his overall portfolio will have a standard deviation of 10%.

a. What is the proportion y?
b. What will be the expected rate of return of your client's portfolio?
c. What is the Sharpe ratio of your portfolio?
d) Suppose your client is wondering if he should switch his money in your fund to a passive portfolio invested to mimic the S&P 500 stock index yields an expected rate of return of 9% with a standard deviation of 25%. Show your client the maximum fee you could charge (as a percent of the investment in your fund deducted at the end of the year) that would still leave him at least as well off investing in your fund as in the passive one.

Answer rating: 100% (QA)

a To determine the proportion y we can use the formula for the standard deviation of a portfolio Portfolio Standard Deviation sqrty2 Risk of Risky Por... View the full answer