Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

4. Your aunt is a typical mean-variance investor with a home bias, currently invested 100% in a diversified Spanish equity portfolio with expected re- turn

4. Your aunt is a typical mean-variance investor with a home bias, currently invested 100% in a diversified Spanish equity portfolio with expected re- turn of 12.46% and volatility of 15.76%. She is considering changing 20% of her portfolio. One option is fund N, an investment fund that invests in Spanish start-ups, with an expected return of 14.69% and a volatility of 32.5%. Based on historical data, she has determined its correlation with his current portfolio to be 0.7274. She is also considering the Exotic fund, which invests in several emerging markets. The expected return on the fund is only 12%; it has 34% volatility and a correlation of 0.2 with her portfolio. The correlation of the Exotic fund with the fund is 0.15. Assume that the risk-free rate is 5%. If your aunt is interested in improving the Sharpe ratio of her portfo- lio, will she invest a positive amount in one of the funds? Which one? Carefully explain your reasoning (HINT: Remember, the Sharpe ra- tio is computed as the extra return of the portfolio with respect to the risk-free rate and over the standard deviation of the portfolio).
image text in transcribed
4. Your aunt is a typical mean-variance investor with a home bias, currently invested 100% in a diversified Spanish equity portfolio with expected return of 12.46% and volatility of 15.76%. She is considering changing 20% of her portfolio. One option is fund N~, an investment fund that invests in Spanish start-ups, with an expected return of 14.69% and a volatility of 32.5%. Based on historical data, she has determined its correlation with his current portfolio to be 0.7274 . She is also considering the Exotic fund, which invests in several emerging markets. The expected return on the fund is only 12%; it has 34% volatility and a correlation of 0.2 with her portfolio. The correlation of the Exotic fund with the N fund is 0.15 . Assume that the risk-free rate is 5%. - If your aunt is interested in improving the Sharpe ratio of her portfolio, will she invest a positive amount in one of the funds? Which one? Carefully explain your reasoning (HINT: Remember, the Sharpe ratio is computed as the extra return of the portfolio with respect to the risk-free rate and over the standard deviation of the portfolio)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Money Banking And Financial Markets

Authors: Stephen G. Cecchetti

1st Edition

0072452692, 9780072452693

More Books

Students also viewed these Finance questions

Question

What factors contribute most to the comprehension of read text?

Answered: 1 week ago

Question

What are the attributes of a technical decision?

Answered: 1 week ago

Question

How do the two components of this theory work together?

Answered: 1 week ago

Question

What benefit or advantage does your organization offer each public?

Answered: 1 week ago