Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

7. (3+3+3+2) Your employer offers two funds for your pension plan, a money market fund and an S&P 500 index fund. The money market fund

image text in transcribed

7. (3+3+3+2) Your employer offers two funds for your pension plan, a money market fund and an S&P 500 index fund. The money market fund holds 3- month Treasury bills, which currently offer a 3% safe return per year. The S&P 500 index fund offers an expected return of 10% per year with a standard deviation of 20%. a) You want to achieve an expected return of 8% per year for your portfolio. What should be the composition of your portfolio? What is the standard deviation of its returns? b) Now your employer adds an emerging-market fund to the two existing funds. The emerging- market fund offers an expected return of 10% per year, the same as the S&P 500 index fund, but with a standard deviation of 30%, higher than the S&P 500 index fund. Would you consider including the emerging-market fund as part of your portfolio? Explain. c) The correlation between the S&P 500 index fund and the emerging- market fund is zero. Consider portfolio A, which consists of 80% in the S&P index fund and 20% in the emerging- market fund. Calculate portfolio A's expected return and standard deviation. If you mix portfolio A with the money-market fund to achieve an expected return of 8%, is it better than the portfolio in part (a) of this question? Explain|

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

Sarbanes Oxley And The New Internal Auditing Rules

Authors: Robert R. Moeller

1st Edition

0471483060, 978-0471483069

More Books

Students also viewed these Accounting questions

Question

1. Understand how verbal and nonverbal communication differ.

Answered: 1 week ago