Question
A portfolio manager is considering the benefits of increasing her diversification by investing overseas. She can purchase shares in individual country funds with the following
A portfolio manager is considering the benefits of increasing her diversification by investing overseas. She can purchase shares in individual country funds with the following characteristics: United States (%) United Kingdom (%) Spain (%) Expected return 7.0% 7.1% 7.5% Standard deviation of return 15.1% 15.1% 20.8% Correlation with the United States 1 0.64 0.70
a. What are the expected return and standard deviation of return of a portfolio with 25% invested in the United Kingdom and 75% in the United States?
b. What are the expected return and standard deviation of return of a portfolio with 25% invested in Spain and 75% in the United States?
c. Calculate the expected return and standard deviation of return of a portfolio with 50% invested in the United States and 50% in the United Kingdom; with 50% invested in the United States and 50% invested in Spain.
d. Calculate the expected return and standard deviation of return of a portfolio with 25% invested in the United States and 75% in the United Kingdom; with 25% invested in the United States and 75% invested in Spain.
e. Plot these two sets of risk-return combinations (parts a through d). Which leads to a better set of risk-return choices, Spain or the United Kingdom?
f. How can you achieve an even better risk-return combination?
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