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Improving expected rate of return without portfolio risk

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Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio's expected annual rate of return is 9 percent, and the annual standard deviation is 10 percent. Amanda Reckonwith, Percival's financial adviser, recommends that Percival consider investing in an index fund which closely tracks the Standard and Poor's 500 index. The index has an expected return of 14 percent, and its standard deviation is 16 percent.

a. Suppose Percival puts all his money in a combination of the index fund and Treasury Bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 6 percent.

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Solution Summary

Calculations are given and explained to find whether Percival can expect to improve his rate of return without changing his risk rate once he puts $10 million in index funds and treasury bills.

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The Treasury bill yield is 6 percent.

Percival's current portfolio provides an expected return of 9 percent with an annual standard deviation of 10 percent. We must first find the portfolio ...

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