You manage an equity fund with an expected risk premium of 10.6% and a standard

Question

You manage an equity fund with an expected risk premium of 10.6% and a standard deviation of 20%. The rate on Treasury bills is 6%. Your client chooses to invest $50,000 of her portfolio in your equity fund and $50,000 in a T-bill money market fund. What is the expected return and standard deviation of return on your client

You manage an equity fund with an expected risk premium of 10.6% and a standard deviation of 20%. The rate on Treasury bills is 6%. Your client chooses to invest $50,000 of her portfolio in your equity fund and $50,000 in a T-bill money market fund. What is the expected return and standard deviation of return on your client

Explanation / Answer

risk premium =Rm-Rf

             10.6=Rm-6

        hence return on market = 16.6%

Expected return of portfolio= Rm*Weight of market+Rf* weight of risk free

                                           =16.6*.5+6*.5

                                          =11.3%

Standered deviation of portfolio= (sd)A*weight of A

                                                 =20*.5

                                                  =10%

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