Question
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%. A
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%. A client is thinking about investing in a passive risky portfolio, the S&P 500 stock index, instead of your risky portfolio. Assume that the S&P 500 stock index has an expected return of 13% and a standard deviation of 25%. If the client is thinking about investing 70% of his portfolio in the passive index, then what is his expected return and standard deviation? Can you show that this client can do better using your risky portfolio instead of the passive index? Please show work.
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