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19 April, 11:56

You manage an equity fund with an expected risk premium of 13.8% and a standard deviation of 52%. The rate on Treasury bills is 3.6%. Your client chooses to invest $120,000 of her portfolio in your equity fund and $30,000 in a T-bill money market fund. What is the expected return and standard deviation of return on your client's portfolio?

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  1. 19 April, 12:45
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    Answer and Explanation:

    Expected return on Equity fund = Treasury bills rate + Expected risk premium = 13.8% + 3.6%

    = 17.4%

    Expected return portfolio = 80% of Expected return on Equity fund + 20% of Treasury bills rate

    = (17.4% x 80%) + (3.6% x 20%)

    = 14.64%

    Standard deviation portfolio = 80% of standard deviation

    80% * 52% = 41.60%

    Note: Assume 80% Portfolio in fund and 20% in Treasury bills.
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