Consider historical data showing that the average annual rate of return on the S

Question

Consider historical data showing that the average annual rate of return on the S&P; 500 portfolio over the past 85 years has averaged roughly 8% more than the Treasury bill return and that the S&P; 500 standard deviation has been about 23% per year. Assume these values are representative of investors' expectations for future performance and that the current T-bill rate is 6%. Calculate the expected return and variance of portfolios invested in T-bills and the S&P; 500 index with weights as shown below. (Enter your answers as decimals rounded to 4 places. Leave no cells blank - be certain to enter "O" wherever required.) Answer is complete but not entirely correct. Expected Return WBills WIndex 1.0 0.8 0.6 0.4 Variance 0.0 0.2 0.4 0.6 0.8 1.0 0.1400 12.4000 10.8000 9.2000 7.6000 6.0000 0.0529 Example 0.0339 0.0190 0.0085 0.0021 0.0

Explanation / Answer

You have entered the values in percentage whereas they need to be entered in decimal form upto 4 decimals. To convert percentage to decimal, divide the percentage value by 100.

Expected return of index = 6% + 8% = 14% or 0.14

Expected return of bills = 6% or 0.06

WBills Windex Expected return 0.2 0.8 0.1240 0.4 0.6 0.1080 0.6 0.4 0.0920 0.8 0.2 0.0760 1.0 0.0 0.0600

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