Assume a high net worth individual that is invested 50-50 in stocks and bonds wants to allocate
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Assume a high net worth individual that is invested 50-50 in stocks and bonds wants to allocate 30 % of his current portfolio to hedge funds. His advisor suggests reallocating a portion of his equity investments to meet this objective. Assume the historical returns from stocks is 12%, bonds is 4% and hedge funds are 10%, and that the volatility of stocks is 12%, the volatility of bonds is 5% and the volatility of hedge funds is 6%.The correlation between stocks and bonds is .1, between stocks and hedge funds is .4 and between bonds and hedge funds is -.1. What is the original expected return and volatility? What is the new expected return and volatility? How did the change in allocation impact risk-adjusted returns?
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