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O 6. O 12 O 18. O 36. QUESTION 32 A portfolio manager is interested in constructing a portfolio using three asset classes: U.S. stocks,
O 6. O 12 O 18. O 36. QUESTION 32 A portfolio manager is interested in constructing a portfolio using three asset classes: U.S. stocks, U.S. bonds, and foreign stocks. The research team estimates the following inputs for calculating the expected retun and variance of the three asset portfolio. The team also forecasts the expected return and the standard deviation of the Morgan Stanley EAFE index Europe, Australia, Far East) as a proxy for the market portfolio Standard deviation (%) 20 12 30 28 Expected return (%) Asset US. stocks U.S.bonds Foreign stocks Market portfolio - EAFE 12 18 15 Risk-free rate Correlation matrix U.S. Stocks U.S. bonds SocksS.bonds 1.00 Foreign Stocks 0.00 Foreign stocks0.10 0.00 Based on the estimates above, the portfolio manager decides to construct a portfolio that is 1/3 in U.S, stocks, 1/3 in U.S. bonds, and 13 in foreign stocks. The manager is also interested in the beta coefficient measured against the EAFE index for the portfolio that she constructs. The covariance between U.S. bonds and foreign stocks is closest to 0-60. O 60. O 600 QUESTION 33 Portfolio Frontier
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