Problem 1 is solved, I need help with problem 2 that are given below: Assume that your risky portfolio has an expected rate of return of 20% with a standard deviation of 36%. For your investment horizon, the appropriate T-bill rate is 5%. Your risky portfolio includes the following investments in the given proportions:

Stock A 35 percent Stock B 36 percent Stock C 29 percent

Your client chooses to invest 60% of her portfolio in your fund (risky portfolio) and 40% in a T-bill money market fund promising a 5% return.

a) What is the expected rate of return and the standard deviation of the clients portfolio?

Expected Return of Portfolio

= weight of risky assets* expected return of risky assets + weight of risk free asset*return on risk free asset

= .60*.20 + .40*.05

= .12 + .02 = 14%

Standard Deviation

= .60*.36

= 21.6%

b) What are the investment proportions of your clients overall portfolio, including the position in T-bills?

Investment Proportion

Stock A = .60*.35 = 21%

Stock B = .60*.36 = 21.6%

Stock C = .60*.29 = 17.4%

T-bill = 40%

c) What is the reward-to-volatility ratio of your risky portfolio? Of your clients portfolio?

Reward to volatility ratio of risky asset

= Expected Return of risky asset - Risk free Rate / Standard deviation of risky asset

= .20- .05 / .36 = .4166

Reward to Volatility ratio of Client portfolio

= .14 - .05 / .216

= .4166

Problem 2: Utilize the information provided for problem 1 above and assume that your client decides to invest in your portfolio a proportion y of the total investment budget so that the overall portfolio will have an expected rate of return of 18%

a) Calculate (quantify) the proportion y that the client wants to invest!

b) What are your clients investment proportions in your three stocks and the T-bill fund?

c) What is the standard deviation of the rate of return on your clients portfolio?