A fund manager (FM) is constructing a portfolio of two asset classes, a stock and a...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A fund manager (FM) is constructing a portfolio of two asset classes, a stock and a corporate bond. The return on the stock is 12%, and its standard deviation of return is 17%, while for the bond is 5% and its standard deviation is 12%. The correlation between their returns is -0.2. 1.1 If the FM requires a portfolio return of 9.2%, what should the proportions of each asset class be? (present your calculations) (5 marks) 1.2 What is the standard deviation of return of the above portfolio? (present your calculations) (5 marks) SSOS VIGE 1.3 Interpret the standard deviation of return of the portfolio in relation to the weighted average of the risk of those two assets (present your calculations). Present, on a graph, the relationship between risk and return of the portfolio in 1.1. Identify the point (P) which would represent the portfolio. (5 marks) RADA Discuss the diversification benefits from the combination of those two assets. Relate to your graph. (5 marks) EBAIG What is the utility of an investor at point P (the portfolio in 1.1) with a risk aversion coefficient of 3? 29TAC MAD OT EMOT (5 marks) Gold is owned by many rational investors as part of an extended portfolio. Why? (5 marks) A fund manager (FM) is constructing a portfolio of two asset classes, a stock and a corporate bond. The return on the stock is 12%, and its standard deviation of return is 17%, while for the bond is 5% and its standard deviation is 12%. The correlation between their returns is -0.2. 1.1 If the FM requires a portfolio return of 9.2%, what should the proportions of each asset class be? (present your calculations) (5 marks) 1.2 What is the standard deviation of return of the above portfolio? (present your calculations) (5 marks) SSOS VIGE 1.3 Interpret the standard deviation of return of the portfolio in relation to the weighted average of the risk of those two assets (present your calculations). Present, on a graph, the relationship between risk and return of the portfolio in 1.1. Identify the point (P) which would represent the portfolio. (5 marks) RADA Discuss the diversification benefits from the combination of those two assets. Relate to your graph. (5 marks) EBAIG What is the utility of an investor at point P (the portfolio in 1.1) with a risk aversion coefficient of 3? 29TAC MAD OT EMOT (5 marks) Gold is owned by many rational investors as part of an extended portfolio. Why? (5 marks)
Expert Answer:
Answer rating: 100% (QA)
11 To determine the proportions of each asset class in the portfolio we can use the formula for the optimal portfolio weight Weight of Stock ws Return of Bond RiskFree Rate Return of Stock Return of B... View the full answer
Related Book For
Fundamentals of corporate finance
ISBN: 978-0073382395
9th edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
Posted Date:
Students also viewed these finance questions
-
15. A social psychologist asked 15 college students how many times they "fell in love" before they were 11 years old. The numbers of times were as follows: 2, 0, 6, 0, 3, 1, 0, 4, 9, 0, 5, 6, 1, ,0,...
-
13. What is a lower bound for the price of 3-month call option on a non- dividend-paying stock when the stock price is $50, the strike price is $45, and the 3-month risk-free interest rate is 8%?...
-
CoursHeroTranscribedText: A 5-year loan in the amount of $48,000 is to be repaid in equal annual payments. What is the remaining principal balance after the third payment if the interest rate is 5...
-
Prepare the schedule of year-end deferred tax assets and liabilities for each year. The schedule should separately list the sources of the firms ending deferred tax assets and deferred tax...
-
Monarch Financial Holdings, Inc. executed a 6-for-5 traditional split on October 5. Before the split there were approximately 4,800,000 shares outstanding, each at a share price of $18.00. a. Use the...
-
Blocking the entry of other firms and/or substitute goods is essential for maintaining a monopoly. What are some of the business strategies used to do this blocking?
-
During 20XB, Sunflower Energy incurs the following costs relating to Lease A, a producing property: REQUIRED: Determine the tax basis of any assets and the amount of any tax deductions. Supplies for...
-
Theresa Thayer, a friend from college, asks you to form a partnership to import fragrances. Since graduating, Thayer has worked for the Spanish Embassy, developing important contacts among government...
-
For this question, you should type which formula you should use (simple, compound, annuity, payout annuity, loan). You should also tell me which variable you will be solving for, and you should type...
-
Steve, Carol, and Lisa get their first full-time jobs and talk about saving for retirement. They are each 22 years old and plan to work until they are 55. Steve starts investing immediately and puts...
-
The company has 150,000 preferred shares issued and outstanding for the entire year. The preferred shares are non-cumulative and non-participating. There is a conversion feature where each preferred...
-
Define the following terms: capital goods, consumer goods and services, consumption, demand, distribution, economic goods, economic resources, economic services, economic need, economy, elastic...
-
1. How can j crew ( clothing brand) Increasing its online presence in order to reach a larger audience 2. How can j crew Offer more affordable products in order to appeal to a wider range of...
-
How does globalization impact local cultural identities, and what does this mean for the preservation or transformation of cultural heritage ?
-
Write a Marketing program for client retention strategy for a consulting firm that is involved in grant writing. Develop your program marketing mix (4 Ps) that helps company to reach its goals and to...
-
A 45x oil-immersion objective is marked NA 1.2. It uses oil that has an index of refraction of 1.50. The instrument tube has length of 16 cm. Y Part A What is the lens diameter? Express your answer...
-
. Present value of an annuity Consider the following case. (Click on the icon here .- in order to copy the contents of the data table below into a spreadsheet.) Amount of annuity Interest rate...
-
In the simple quantity theory of money, what will lead to an increase in aggregate demand? In monetarism, what will lead to an increase in aggregate demand?
-
Mark Sexton and Todd Story have been discussing the future of S&S Air. The company has been experiencing fast growth, and the two see only clear skies in the company's future. However, the fast...
-
Consider a project to supply Detroit with 35,000 tons of machine screws annually for automobile production. You will need an initial $3,200,000 investment in threading equipment to get the project...
-
In the previous question, assume Phillips pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not. Prepare the pro forma statements...
-
Aaron Energy Corporation has the following account balances at 12/31/15: At 12/31/15, Lease A is considered to be 40% impaired. Aaron Energys estimated abandonment rate of insignificant unproved...
-
Dwight Oil and Gas Company has the following information at 12/31/15. Production in 2015: Capitalized costs, plus future development costs..... Accumulated DD&A.. Proved reserves Oil. Gas. $2,000,000...
-
Complex Corporation started operations on 1/1/15. At 12/31/15, the company owned the following leases in Canada: Compute DD&A for Canada, assuming the following: a. No exclusions from the...
Study smarter with the SolutionInn App