Investment Theory

Consider the following four index funds: 5. Fund A Fund B Fund C Fund D Exp. Return (%) 15 11 16 14 Std. Dev. (% 25 22 25 22 Assume a risk-free rate of 3% a. As a risk averse investor considering both mean return and volatility, which of the funds would you choose to invest in? (on a stand-alone basis) b. Your cousin holds a portfolio of $2 million, invested across stocks and bonds, yielding an annual 13.8% expected return with a volatility of 23.1%. She expects to inherit an additional $2 million and would like to invest the entire amount in an index fund that best complements her current portfolio. She is contemplating the four funds above (all investing in asset classes not substantially represented in her current portfolio) Their correlations with her current portfolio are: 0.8, 0.6,0.9 and 0.65 for funds A, B, C and D, respectively. Which of the funds wou ld you advise she invest in? Explain