Investment in a risky portfolio.
Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation for 27%. The T-bill rate is 7%.
Your risky portfolio includes the following investments in the given proportions:
Stock A 27%
Stock B 33%
Stock C 40%
Suppose a client decides to invest in your risky porfolio a proportion of (y) for his total investment budget with the remainder in a T-bill money market fund so that his overall portfolio will have an expected rate for return of 15%.
(a) What is the proportion y?
Proportion ____________
(b) what are your client's investment proportions in your three stocks and the T-bill fund?
Security
T-bills _____________ %
Stock A ______________%
Stock B _______________%
Stock C _______________%
(c) what is the standard deviation of the rate of return on your clients's portfolio?
Standard deviation _________________%
Expected holding period return and standard deviation
The stock of Business Adventures sells for $40 a share. Its likely divident payout and end-of-year price depend on the state of the economy by the end of the year as follows:
Divident stock price
Boom $2.00 $50
Normal economy 1.00 43
Recession .50 34
Required:
(a) Calculate the expected holding-period return and standard deviation for the holding return. All three scenarios are equally likely.
Expected return ______________%
Standard Deviation _____________%
(b)Calculate the expected return and standard deviation for a portfolio invested half in business adventures and half in Treasury bills. The return on bills is 4%.
Expected return __________%
Standard devation ____________%
