Consider the following information about a risky portfolio that you manage, and

Question

Consider the following information about a risky portfolio that you manage, and a risk-free asset: E(rP) = 11%, P = 17%, rf = 4%.

Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 6%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset? (Round your answer to 2 decimal place. Omit the "%" sign in your response.)

What will be the standard deviation of the rate of return on her portfolio? (Do not round intermediate calculations. Round your answer to 1 decimal place. Omit the "%" sign in your response.)

Another client wants the highest return possible subject to the constraint that you limit his standard deviation to be no more than 12%. Which client is more risk averse?

Consider the following information about a risky portfolio that you manage, and a risk-free asset: E(rP) = 11%, P = 17%, rf = 4%.

Explanation / Answer

let Wp be investment in risky portifolio

=>

Wp * 11% + (1-Wp) * 4% = 6%

=> wp = 28.57%

investment in riskfree asset = 100 - 28.57% = 71.43%

b)

standard deviatio of portifolio = 28.57% * 17% = 4.9%

c)

second client is more risk-averse

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