142 Part TWO Portfolio Theory For Problems 12-16, assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. The T-bill rate is 7%. 12. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill market fund. (LO 5-3) a. What are the expected return and standard deviation of your client's portfolio? b. Suppose your risky portfolio includes the following investments in the given proportions: money 27% Stock A Stock B 33 Stock C 40 your client's overall portfolio. I

Question 2 You invest $1,000,000 in a complete portfolio. The complete portfolio is composed of a risky portfolio with an expected rate of return of 16% and a standard deviation of 20%, and a T-bill with an expected rate of return of 7%. Required: You choose to invest $700,000 of your investment budget in the risky portfolio and the remaining in the T-bill. a) What are the expected return and standard deviation of your complete portfolio? b) Suppose your risky portfolio includes the following investments in the given proportions: Stock A: 40% Stock B: 60% What are the dollar values of your investment in each stock in the risky portfolio? c) What is the Sharpe ratio (S) of your complete portfolio? d) Draw the capital allocation line (CAL) of your complete portfolio on an expected return/standard deviation diagram. Suppose you decide to invest in the risky portfolio a proportion (y) of your total investment budget so that your complete portfolio will have an expected rate of return of…

INV 2 -1b You are considering an investment in a portfolio P with the following expected returns in three different states of nature:   Recession Steady Expansion Probability 0.10 0.55 0.35 Return on P -15% 20% 40%   The risk-free rate is currently 4%, and the market portfolio M has an expected return of 16% and standard deviation of 20%, and its correlation with P is .7.  What is the portfolio P’s beta?

2   Problem 2: Consider a market composed of only two risky assets, A and B, with the following properties: a StockA Expected return 25%, SD 20% StockB Expected return 15%, SD 25% a) Suppose their correlation is 0.8. What is the expected return of the following portfolios: one that invests 0% in A, one that invests 10% in A, 20% in A and so on until 100%? Plot the portfolio frontier formed by these portfolios.b) Repeat part (1) under the assumption that the correlation is -0.8.c) Explain in detail what is the intuition behind the difference across the answers you found for part (1) and part (2).