An investment group offers their clients advice on creating a diversified investment portfolio. A client asks them to develop

a portfolio that includes investment in a Domestic Growth Fund $($a mutual fund composed of US stocks with a history of

strong performance$)$ and a corporate bond fund. The Domestic Growth Fund has an expected return of $7\mathrm{.}90\%$ with a

standard deviation of $18\mathrm{.}15\%.$ The corporate bond fund has an expected percent return of $5\mathrm{.}75\%$ with a standard deviation

of $5\mathrm{.}00\%.$ The covariance of an investment in the Domestic Growth Fund with an investment in a corporate bond fund is

$-12\mathrm{.}3.($Round your answers for standard deviation to two decimal places.$)$

$($a$)$ Which of the funds would be considered the more risky? Why?

The corporate bond fund would be considered more risky because it has a smaller expected percent return.

The Domestic Growth Fund would be considered more risky because it has a larger expected percent return.

The corporate bond fund would be considered more risky because it has a smaller standard deviation.

The Domestic Growth Fund would be considered more risky because it has a larger standard deviation.

Neither fund is risky since both are equivalent.

$($b$)$ If the investment group recommends that the client invest $75\%$ in the Domestic Growth Fund and $25\%$ in the

corporate bond fund, what is the expected percent return and standard deviation for such a portfolio?

expected percent return

standard deviation

$\%($Do not round$)$

$\%($Round to $2$ decimal places$)$

What would be the expected return and standard deviation, in dollars, for a client investing $$40,000$ in such a

portfolio?

expected return $

$($Round to the nearest dollar, and do NOT include the original $$40,000$ investment

standard

amount$)$

deviation

$($Round to the nearest dollar$)$

$($c$)$ If the investment group recommends that the client invest $25\%$ in the Domestic Growth Fund and $75\%$ in the

corporate bond fund, what is the expected return and standard deviation for such a portfolio?

expected percent return

standard deviation

$\%($Do not round$)$

$\%($Round to $2$ decimal places$)$

What would be the expected return and standard deviation, in dollars, for a client investing $$40,000$ in such a

portfolio?

expected return $

$($Round to the nearest dollar, and do NOT include the original $$40,000$ investment

standard

$

$($Round to the nearest dollar$)$

deviation

$($Round to the nearest dollar$)$

$($d$)$ Which of the portfolios in parts $($b$)$ and $($c$)$ would you recommend for an aggressive investor? Which would you

recommend for a conservative investor? Why?

An aggressive investor should use the portfolio in $---$ Select$---$ because it has a $---$ Select$---$ return. A conservative

investor should elect the portfolio in

because it has a

standard deviation $($and because of

this, is less risky$).$