FN $347$: Investments

CFA Exam Case

Background

Stephenson, age $55$ and single, is a surgeon. Stephenson has accumulated a $$2\mathrm{.}0$ million investment portfolio that has a large concentration in small capitalization U$.$S$.$ equities. After further evaluation, Stephenson's financial advisor, Carolyn Coppa, has summarized the distribution of Stephenson's current $$2\mathrm{.}0$ million portfolio, which is as follows:

Stephenson also expects to receive an additional $$2\mathrm{.}0$ million and plans to invest the entire amount in an index fund that best complements the current portfolio. Coppa is$,$ therefore, evaluating four index funds that represent different asset classes not substantially represented in the current portfolio. Coppa plans to evaluate the index funds on their ability to produce a portfolio that will meet the following two criteria relative to the current portfolio: $(1)$ maintain or enhance expected return and$(2)$ maintain or reduce volatility. The characteristics of the four funds Coppa is evaluating are as follows:

$\backslash$table$[[$Index Fund,$\backslash$table$[[$Expected$],[$Annual Return$]],\backslash$table$[[$Expected Annual$],[$Standard Deviation$]],\backslash$table$[[$Correlation of Returns$],[$with Current Portfolio$]]],[$Fund A$,15\%,25\%,+0\mathrm{.}80],[$Fund B$,11\%,22\%,+0\mathrm{.}60],[$Fund C$,16\%,25\%,+0\mathrm{.}90],[$Fund D$,14\%,22\%,+0\mathrm{.}65]]$

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Requirement

Determine which fund Coppa should recommend to Stephenson, and justify your choice by describing $($and calculating$)$ how your chosen fund best meets both of Stephenson's criteria. In addition, as part of the analysis, be sure to calculate the beta of each potential fund relative to the existing portfolio and use this to find the Treynor ratio for each fund $($assuming a $0\%$ riskfree rate$).$

$xp=$ exist thas A that duent meat

$s(17\mathrm{.}8)+0\mathrm{.}5(1S)=-{}_p=\sqrt[\phantom{2}]{{}_a^2{}_a^a+{}_b^2{}_b^2}+2$

bah.

$b_{\text{e}\text{t}\text{r}\text{i}\text{n}}=r$ fond, ensi