Suppose you manage a risky portfolio with expected return 15% and standard deviation 30%. The Treasury bill rate is 5%. Suppose your client invests 70% in your portfolio and 30% in Treasury bills.

a) What is the expected return and standard deviation of the client’s portfolio?

b) What is the Sharpe ratio for your portfolio? Your client’s portfolio?

c) Suppose the client’s degree of risk aversion is 3.5, what should be the proportion of client assets invested in the risky portfolio?

d) Suppose there is a passive portfolio available with expected return 10% and standard deviation 25%. Is there any advantage to your client of moving to the passive fund?

Answer rating: 100% (QA)

Part A ERp W1 x R1 W2 x R2 070 x 15 030 x 5 12 SD with zero correlation SDp W1 x SD12 W2 ... View the full answer