Answered step by step
Verified Expert Solution
Question
1 Approved Answer
An employee contributes $15,800 to a 401(k) plan each year, and the company matches 10 percent of this annually, or $1,580. The employee can allocate
An employee contributes $15,800 to a 401(k) plan each year, and the company matches 10 percent of this annually, or $1,580. The employee can allocate the contributions among equities (earning 11 percent annually), bonds (earning 5 percent annually), and money market securities (earning 3 percent annually). The employee expects to work at the company 20 years. The employee can contribute annually along one of the three following patterns: Option Option Option 1 2 3 Equities 60% 50% 40% Bonds 40% 45% 50% Money market 0% 5% 10% securities 100% 100% 100% The standard deviations of Equities, Bonds, Money market securities are 10%. The correlation between Equities and Bonds is 50%. The correlation between Equities and Money market securities is 50%. The correlation between Money market securities and Bonds is 50%. The risk free rate equals 0%. The risk free rate equals 0%. Assume the employee chooses Option 2 under the above assumptions. What is the expected Sharpe ratio of this investment? (Round your numerical answer to 2 decimal places. (e.g., enter 0.08, but not 8% or 8.00%)) Note: Here is the table in text. Option 1 : 60% Equities , 40% Bonds, 0% Money market securities Option 2: 50% Equities , 45% Bonds, 5% Money market securities Option 3: 40% Equities , 50% Bonds, 10% Money market securities
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started