Jeffrey is currently holding a $2 mil portfolio as follows :

Value % of Total Expected Annual Return Annual Standard Deviation

Short-term bonds 0.2 mil 10 4.6% 1.6%

Large-Cap Equities 0.6 mil 30 12.4% 19.5%

Small-Cap Equities 1.2 mil 60 16.0% 29.9%

Total 2.0 mil 100 13.8% 23.1%

Moreover, he is so lucky that he will have another $2.0 mil so that he is going to invest the additional amount in an index fund. Suppose you are Jeffreys financial planner and you are evaluating 4 index funds for him to form a portfolio which should meet 2 criteria relative to his current portfolio : i) Maintain or enhance the expected return, and, ii) Maintain or reduce the volatility.

Here are the details of these 4 index funds :

Index Fund Expected Annual Return Expected Annual Standard Deviation Correlation of returns to current portfolio

A 15% 25% 0.80

B 11% 22% 0.60

C 16% 25% 0.90

D 14% 22% 0.65

Discuss your suggestion to Jeffrey. You should justify your choice and describe how the chosen fund can best meet the two criteria. (5 marks for calculation; 5 marks for discussion and comment)

2. Jeffrey is currently holding a $2 mil portfolio as follows: Value % of Total Expected Annual Standard Annual Return Deviation 10 4.6% 1.6% 0.2 mil 0.6 mil 30 12.4% 19.5% Short-term bonds Large-Cap Equities Small-Cap Equities Total 1.2 mil 60 16.0% 29.9% 2.0 mil 100 13.8% 23.1% Moreover, he is so lucky that he will have another $2.0 mil so that he is going to invest the additional amount in an index fund. Suppose you are Jeffrey's financial planner and you are evaluating 4 index funds for him to form a portfolio which should meet 2 criteria relative to his current portfolio : ) Maintain or enhance the expected return, and, ii) Maintain or reduce the volatility. Here are the details of these 4 index funds: Index Funde Expected Annual Return Expected Annual Standard Deviation Correlation of returns to current portfolio A 15% 25% 0.80 B Ce 11% 16% 14% 22% 25% 22% 0.60 0.90 0.65 D Discuss your suggestion to Jeffrey. You should justify your choice and describe how the chosen fund can best meet the two criteria. (5 marks for calculation; 5 marks for discussion and comment)