10. Molly and Jack are trying to decide how to allocate their investment portfolio. The risk-free...

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10. Molly and Jack are trying to decide how to allocate their investment portfolio. The risk-free rate is 4%. An advisor has alerted them to 3 funds as follows. Fund Canadian Bond E(r) 6% 8% U.S. Equity 18% Canadian Small Cap 15% 25% 18% a) Is there one of these funds that stands out as being superior to the others? Support your conclusion with numerical analysis. (3 marks) b) Regardless of your answer in Part A, assume Molly and Jack both decide they are going to allocate their investment portfolio between the risk-free asset and the above U.S. Equity fund. Their advisor asks them to fill out a questionnaire which will arrive at a risk factor for each of them. It turns out Molly has a risk factor of 2, whereas Jack has a risk factor of 5. The advisor tells them he uses this factor to help them determine how to allocate their portfolio between the two funds. He attempts to find the highest value for U in the following equation: U=E(r) A Since A is the risk factor mentioned above, is Molly or Jack more willing to take additional risk? (1 mark) c) Based on the above equation, what is the optimal allocation of funds (i.e. % of their portfolio) between the U.S. equity fund and the risk-free asset for each of Molly and Jack? (6 marks - round percentages to 2 decimal places) 10. Molly and Jack are trying to decide how to allocate their investment portfolio. The risk-free rate is 4%. An advisor has alerted them to 3 funds as follows. Fund Canadian Bond E(r) 6% 8% U.S. Equity 18% Canadian Small Cap 15% 25% 18% a) Is there one of these funds that stands out as being superior to the others? Support your conclusion with numerical analysis. (3 marks) b) Regardless of your answer in Part A, assume Molly and Jack both decide they are going to allocate their investment portfolio between the risk-free asset and the above U.S. Equity fund. Their advisor asks them to fill out a questionnaire which will arrive at a risk factor for each of them. It turns out Molly has a risk factor of 2, whereas Jack has a risk factor of 5. The advisor tells them he uses this factor to help them determine how to allocate their portfolio between the two funds. He attempts to find the highest value for U in the following equation: U=E(r) A Since A is the risk factor mentioned above, is Molly or Jack more willing to take additional risk? (1 mark) c) Based on the above equation, what is the optimal allocation of funds (i.e. % of their portfolio) between the U.S. equity fund and the risk-free asset for each of Molly and Jack? (6 marks - round percentages to 2 decimal places)

Answer rating: 100% (QA)

a To determine which fund stands out as superior we can calculate the riskadjusted return for each f... View the full answer