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You manage a risky portfolio with an expected rate of return of 18.00% The standard deviation of returns is 28.00% 17 The T-bill rate is

You manage arisky portfolio with an expected rate of return of

18.00%

The standard deviation of returns is

28.00%

17

The T-bill rate is

8.00%

18

Suppose that your client decides to invest in your portfolio a proportion [y] of the total investment budget

19

so that the overall portfolio will have an expected rate of return of

16.00%

20

Your risky portfolio includes the following investment in the given proportions:

21

Stock A

25.00%

22

Stock B

32.00%

23

Stock C

43.00%

24

25

Refer to the model

E(rc) = rf + [E(rp) - rf]*y

26

Solve for y

27

28

In order to have an Expected Portfolio Return of 16%, What proportion must your client invest

29

in Risky assets of this portfolio? This is [y].

30

y = [E(rc) - rf] / [E(rp) - rf]

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