- Struggling With The Second Part Of The Question B 1 (180.43 KiB) Viewed 60 times
Struggling with the second part of the question b
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answerhappygod
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Struggling with the second part of the question b
Struggling with the second part of the question b
1. (20 points) You are the portfolio manager of a mutual fund that is invested 70% in stock X and 30% in stock Y. The stocks have the following expected returns and standard deviations Std. Deviation Expected return 15% 20% Stock X Stock Y 10% 30% The correlation coefficient between the return on stock X and Y is 0.20. Currently, the risk-free rate is 5%. a. (5 points) What are the expected return (in %) and the standard deviation (in %) of the return of your portfolio? (keep two decimals) E(p) = 16.50% :(p) = 12.46% b. (15 points) You are advising a client who now has all of his wealth consisting of $1 million entirely invested in a fund with an expected return of 20% and standard deviation of 20%. Your client is perfectly happy with a portfolio that has a standard a deviation of 20%. 1) Could you recommend your client a better portfolio that combines your mutual fund and the risk free asset? (Hint: compare the Sharpe ratio of your client's portfolio with the Sharpe ratio of your portfolio.) If so, what percentages of your client's $1 million would be invested in your fund and what percentages would be invested at the risk free rate? (keep two decimals) Client Sharpe Ratio: 75.00% Portfolio Sharpe Ratio: 92.31%
1. (20 points) You are the portfolio manager of a mutual fund that is invested 70% in stock X and 30% in stock Y. The stocks have the following expected returns and standard deviations Std. Deviation Expected return 15% 20% Stock X Stock Y 10% 30% The correlation coefficient between the return on stock X and Y is 0.20. Currently, the risk-free rate is 5%. a. (5 points) What are the expected return (in %) and the standard deviation (in %) of the return of your portfolio? (keep two decimals) E(p) = 16.50% :(p) = 12.46% b. (15 points) You are advising a client who now has all of his wealth consisting of $1 million entirely invested in a fund with an expected return of 20% and standard deviation of 20%. Your client is perfectly happy with a portfolio that has a standard a deviation of 20%. 1) Could you recommend your client a better portfolio that combines your mutual fund and the risk free asset? (Hint: compare the Sharpe ratio of your client's portfolio with the Sharpe ratio of your portfolio.) If so, what percentages of your client's $1 million would be invested in your fund and what percentages would be invested at the risk free rate? (keep two decimals) Client Sharpe Ratio: 75.00% Portfolio Sharpe Ratio: 92.31%