p. 65 Ex. 11 Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $50,000 or S150,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 5%. a. If you require a risk premium of 10%, how much will you be willing to pay for the portfolio? b. Suppose the portfolio can be purchased for the amount found in a) What will the expected rate of return on the portfolio be? C. Now suppose you require a risk premium of 15%. What is the price you will be willing to pay now? d. Comparing your answers to a) and c) what do you conclude about the relationship between the required risk premium on a portfolio and the price at which the portfolio will sell? 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%. p. 66 Ex. 14 Suppose a client prefers to invest in your portfolio a proportion y and I-y in a T-bill money market fund. He chooses proportion in a way that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio's standard deviation will not exceed 20%. a. What is the investment proportion, y? b. What is the expected rate of return on the overall portfolio? p. 66 Ex. 15 You estimate that a passive portfolio invested in to mimic the S&P500 stock index yields an expected rate of return of 13% with a standard deviation of 25%. Draw the CML and your fund's CAL on an expected return/standard deviation diagram. a. What is the slope of the CML? b. Characterize in one short paragraph the advantage of your fund over the passive fund? p. 68 CFA Bear Market Noemal Market Bull Market 0.5 18% 20% Probability 02 Stock X 0.3 50% 10% Stock Y -15% 7. What are the expected returns for stocks X and Y? 8. What are the standard deviations of returns on stocks X and Y