Carlo Ponti has an investment budget of $100,000. He has two investment alternatives to choose. First...

  

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Carlo Ponti has an investment budget of $100,000. He has two investment alternatives to choose. First alternative is in an equally weighted portfolio consisting of two assets: Stock A with an expected return of 12% and standard deviation of 20% and T-bills. Second alternative is investing $120,000 in a market index fund. The market index (M) has expected return of 15% and standard deviation of 25%. Carlo can borrow or lend at the T-bills rate (risk-free) of 3%. Based on above information estimate: 4 a) Expected return (%) on the first investment alternative. [2 points] b) Standard deviation on the first alternative. [2 points] c) Reward to variability ratio (RTV) of the first alternative (Stock A and T-bills) [2 points] d) Expected return (%) on investment of $120,000 on the market fund index (alternative 2) [4 points] 4 e) The standard deviation of the $120,000 investment on the market index fund. [4 points] f) The reward to variability ratio (RTV) of investing $120,000 on the market index fund. [2 points] g) Which of the two investment alternatives is best? Justify your answer. [2 points] Carlo Ponti has an investment budget of $100,000. He has two investment alternatives to choose. First alternative is in an equally weighted portfolio consisting of two assets: Stock A with an expected return of 12% and standard deviation of 20% and T-bills. Second alternative is investing $120,000 in a market index fund. The market index (M) has expected return of 15% and standard deviation of 25%. Carlo can borrow or lend at the T-bills rate (risk-free) of 3%. Based on above information estimate: 4 a) Expected return (%) on the first investment alternative. [2 points] b) Standard deviation on the first alternative. [2 points] c) Reward to variability ratio (RTV) of the first alternative (Stock A and T-bills) [2 points] d) Expected return (%) on investment of $120,000 on the market fund index (alternative 2) [4 points] 4 e) The standard deviation of the $120,000 investment on the market index fund. [4 points] f) The reward to variability ratio (RTV) of investing $120,000 on the market index fund. [2 points] g) Which of the two investment alternatives is best? Justify your answer. [2 points]

Answer rating: 100% (QA)

SOLUTION a The expected return on the equally weighted portfolio consisting of Stock A and Tbills is ... View the full answer