Question
Suppose you can invest in only the market index fund and 12-month Treasury bill because of some regulation. E[r]=11%, SD[r]=20%, and rf=3% per year. You
Suppose you can invest in only the market index fund and 12-month Treasury bill because of some regulation. E[r]=11%, SD[r]=20%, and rf=3% per year. You are a portfolio manager at Fidelity. Suppose, based on your price of risk and the portfolio theory, you invest today $0.4m in the market index fund and $0.6m in the 12-month treasury bill whose maturity is one year from now. One year later, the annual net return of the market index fund turns out 30%. If E[r], SD[r], rf, and your price of risk remain the same, how should you rebalance your portfolio? That is, do you have to sell or buy the market index fund after you observe its 30% return per year, based on the portfolio theory? Express your answer as follows. If you will sell $0.24m of the market index fund and move that money to the 12-month Treasury bill, type -240000. If you will sell $0.34m of 12-month Treasury bill and buy the market index fund with that money, type 340000
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