Question
Assume you want to invest in a market with two risky assets and the risk-free rate. The numbers are in the below table: Risky Asset
Assume you want to invest in a market with two risky assets and the risk-free rate. The numbers are in the below table:
Risky Asset 1Risky Asset 2Risk-free Asset Return12.50%7.50%1.25%Risk25.50%15.50% Correlation0.65It is possible to choose from eight different portfolios of risky assets, with weights:
Weight (Risky Asset 1)Weight (Risky Asset 2)Portfolio 1-20%120%Portfolio 20%100%Portfolio 320%80%Portfolio 440%60%Portfolio 560%40%Portfolio 680%20%Portfolio 7100%0%Portfolio 8120%-20%Show how it is possible to select the best risky portfolio, given the information you have. Solve this part by doing the calculations on the Excel file
Part 2 (Excel): Consider now a market where three funds can be traded, and you want to understand which is the best investment for you, based on all the performance measurement tools learned in class. The numbers are:
BetaTracking ErrorFund 110.50%16.50%0.1018.00%Fund 216.50%23.50%1.1021.00%Fund 335.50%32.00%0.5022.50%Index15.00%18.50% Risk-free1.25%Write the solution in Section 2 of the Excel and answer the following questions as well:
Which fund(s) outperform the benchmark (index)?
Which portfolio offers the highest compensation for risk? Which fund has the most consistent performance over time?
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