You have $1M to invest. You want to maximize returns subject to a portfolio standard deviation...

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You have $1M to invest. You want to maximize returns subject toa portfolio standard deviation of 11%. Assume the S&P500 indexis the market portfolio (m), and that it has an expected return of9% and a standard deviation of 15%. The risk free rate is 3%.
(a) Consider investing in a combination of m and rf. Given yourwillingness to accept a standard deviation of 11%, what is theexpected return on your portfolio?
You are now contemplating a different portfolio. You have donesome research and discovered an exciting investment opportunity – ahedge fund X which exploits new and non-standard data to gain aninvestment edge. Fund X has a beta of 0.4, standard deviation of27%, and you expect that it will generate an alpha of 2.6%.
(b) Given your estimates of alpha and beta, what is the expectedreturn on fund X?

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3.6 Ratings (445 Votes)

Market PortfolioAsset 1Risk Free InvestmentAsset 2Return of asset1R19Return of asset2R23Standard deviation of asset 1S115Standard See Answer

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You have $1M to invest. You want to maximize returns subject toa portfolio standard deviation of 11%. Assume the S&P500 indexis the market portfolio (m), and that it has an expected return of9% and a standard deviation of 15%. The risk free rate is 3%.(a) Consider investing in a combination of m and rf. Given yourwillingness to accept a standard deviation of 11%, what is theexpected return on your portfolio?You are now contemplating a different portfolio. You have donesome research and discovered an exciting investment opportunity – ahedge fund X which exploits new and non-standard data to gain aninvestment edge. Fund X has a beta of 0.4, standard deviation of27%, and you expect that it will generate an alpha of 2.6%.(b) Given your estimates of alpha and beta, what is the expectedreturn on fund X?