Aarvi, a portfolio manager of WX Mutual Fund coordinates and take all necessary decisions to provide the sufficient return to the investors' of fund. The following information is available with respect to the portfolio c

CS Professional · Financial, Treasury and Forex Management · PYQS · June 2018
Aarvi, a portfolio manager of WX Mutual Fund coordinates and take all necessary decisions to provide the sufficient return to the investors' of fund. The following information is available with respect to the portfolio created and managed by her : (1) Risk free rate of interest generally applicable in an economy is 8%. (2) Expected market return by investing community is 14%. (3) Standard deviation of assets deployed by fund is 3.0%. (4) Standard deviation registered and normally recorded by market is 4%. (5) Correlation coefficient of portfolio of fund with market is 1%. From the above information, calculate the expected rate of return of portfolio.

Answer & Explanation:

Expected rate of return of a portfolio R e = R f + B j (R m - R f ) Where R e is expected rate of return of portfolio R f is risk free rate of return B j coefficient of portfolio of fund R m is expected rate of return of market portfolio B j = R sm * σ s / σ m Where R sm is correlation coefficient of portfolio with market σ s is standard deviation of an asset σ m is market standard deviation B j = 1 * 3/4 = 0.75 R e = 8 + 0.75(14-8) = 12.5%

Topics: Portfolio Management

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