Question
A trainee Portfolio Manager at XYZ Capital would like to apply the skills he has acquired at his new role. His first task is to
A trainee Portfolio Manager at XYZ Capital would like to apply the skills he has acquired at his new role. His first task is to construct an optimal risky portfolio made up of stocks and bonds, and a complete portfolio after adding Treasury bills (T-bills) to the optimal risky portfolio. The stocks that have been selected do not correlated with the bonds. He gathered the following information about the assets to be incorporate into the portfolio: Expected return Expected return Standard deviation Stocks 19% 30% Bonds 12% 20% T-bills 5.5% 0 5.5% The trainee Portfolio Manager expects to earn returns above the risk-free rate. Hint: show all steps and calculations when answering the following questions. Round off your final answers to two (2) decimal places.
2.1 Are there diversification benefits to be gained from constructing an optimal risky portfolio? (1)
2.2 Calculate the optimal risky portfolio mix of stocks and bonds. (4)
Hint: calculate the weights for stocks and bonds in the optimal risky portfolio.
2.3 Calculate the expected return and standard deviation of the optimal risky portfolio. (4)
2.4 Find the slope of the capital allocation line (CAL) generated by T-bills and the optimal risky portfolio. (2) 2.5 If the trainee Portfolio Manager wants to allocate 40% of the complete portfolio to the optimal risky portfolio and the remainder to T-bills, calculate the standard deviation of the complete portfolio. (1
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