FINM7008/FINM2003 Tutorial 3 Solutions
Chapter 6
13. Expected return = (0.7 × 18%) + (0.3 × 8%) = 15%
Standard deviation = 0.7 × 28% = 19.6%
14. Investment proportions: 30.0% in T-bills
0.7 × 25% = 17.5% in Stock A
0.7 × 32% = 22.4% in Stock B
0.7 × 43% = 30.1% in Stock C
15. Your reward-to-volatility ratio:
.18 .08
0.3571
.28
S

 
Client's reward-to-volatility ratio:
.15 .08
0.3571
.196
S

 
16.
Client
P
0
5
10
15
20
25
30
0 10 20 30 40

E(r)%
CAL (Slope = 0.3571)
18. a. σC = y × 28%
If your client prefers a standard deviation of at most 18%, then:
y = 18/28 = 0.6429 = 64.29% invested in the risky portfolio.
b. ( ) .08 .1 .08 (0.6429 .1) 14.429%CE r y      
19. a. y* 0.3644
0.2744
0.10
0.283.5
0.080.18
σ 22






P
fP
A
r)E(r
Therefore, the client’s optimal proportions are: 36.44% invested in the risky
portfolio and 63.56% invested in T-bills.
b. E(rC) = 0.08 + 0.10 × y* = 0.08 + (0.3644 × 0.1) = 0.1164 or 11.644%
C = 0.3644 × 28 = 10.203%