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Please show all work in excel. I need it by 11pm tonight. Question #1: Capital Allocation: Consider the following capital market: a risk-free asset yielding

Please show all work in excel. I need it by 11pm tonight.

Question #1: Capital Allocation:

Consider the following capital market: a risk-free asset yielding 1.50% per year and a mutual fund consisting of 75% stocks and 25% bonds. The expected return on stocks is 10.50% per year and the expected return on bonds is 3.75% per year. The standard deviation of stock returns is 35.00% and the standard deviation of bond returns 11%. The stock, bond and risk-free returns are all uncorrelated.

1. What is the expected return on the mutual fund?

2. What is the standard deviation of returns for the mutual fund?

Now, assume the correlation between stock and bond returns is 0.25 and the correlations between stock and risk-free returns and between the bond and risk-free returns are 0 (by construction, correlations with the risk-free asset are always zero).

3. What is the standard deviation of returns for the mutual fund? Is it higher or lower than the standard deviation found in part 2? Why?

Now, assume that the standard deviation of the mutual fund portfolio is exactly 28.50% per year and a potential customer has a risk-aversion coefficient of 2.25.

4. What correlation between the stock and bond returns is consistent with this portfolio standard deviation?

5. What is the optimal allocation to the risky mutual fund (the fund with exactly 28.50% standard deviation) for this investor?

6. What is the expected return on the complete portfolio?

7. What is the standard deviation of the complete portfolio?

8. What is the Sharpe ratio of the complete portfolio?

Question #2:Markowitz Optimization:

Open the associated Excel file named QPS2 Data Fall I 2016 Problem 2 in My Course Content: Problem Set Spreadsheets. The data file includes 60 months of returns for 11 exchange traded funds; their names and ticker symbols follow:

Ticker

Name of Exchange Traded Fund

1

SPY

SPDR S&P 500 ETF

2

MDY

SPDR S&P MidCap 400 ETF

3

IWM

iShares Russell 2000 ETF

4

QQQ

Power Shares QQQ ETF

5

EFA

iShares MSCI EAFE ETF

6

VWO

Vanguard FTSE Emerging Markets Stock Index ETF

7

VNQ

Vanguard REIT Index ETF

8

BND

Vanguard Total Bond Market ETF

9

PFF

iShares US Preferred Stock ETF

10

GLD

SPDR Gold Shares ETF

11

JNK

SPDR Barclays High Yield Bond ETF

All students will do problem 2 using 9 of the above ETFs; all students will include the first 8 ETFs listed above: SPY, MDY, IWM, QQQ, EFA, VWO, VNQ, and BND. All students will include one of the last 3 ETFs: PFF, GLD, and JNK as instructed on your version.

Version A: IncludePFFand exclude GLD and JNK.

Use the data on your9 ETFsto answer the following questions:

1.What is the average return for each of the nine indexes?

2.Show the covariance matrix of returns. Briefly describe how you constructed the covariance matrix.

Consider the simple case where short sales are allowed, but short positions must be greater than or equal to 75% and long positions must be less than or equal to 75%. Use Excel Solver to find the Minimum Variance Portfolio (MVP).

3.What is the expected portfolio return for the MVP portfolio?

4.What is the portfolio standard deviation for the MVP portfolio?

5.What is the portfolio composition (i.e., what are the weights for the nine ETFs)?

Consider the simple case where short sales are allowed, but short positions must be greater than or equal to 40% and long positions must be less than or equal to 40%. Use Excel Solver to find the Maximum return portfolio with a standard deviation of exactly 2.50%.

6.What is the expected portfolio return for this portfolio?

7.What is the portfolio composition (i.e., what are the weights for the nine ETFs)?

Consider the more realistic case where short sales are NOT allowed and no more than 25% of the portfolio and no less than 5% is invested in any ETF. Use Excel Solver to find the Minimum Variance Portfolio (MVP).

8.What is the expected portfolio return for the MVP portfolio?

9.What is the portfolio standard deviation for the MVP portfolio?

10.What is the portfolio composition (i.e., what are the weights for the nine ETFs)?

Consider the simple case where short sales are NOT allowed and no more than 30% and no less than 3% of the portfolio is invested in any ETF. Use Excel Solver to find the Market Portfolio if the risk-free rate is 0.125%/month (1.50%/year).

11. What is the expected portfolio return for this portfolio?

12. What is the portfolio standard deviation for this portfolio?

13. What is the portfolio composition (i.e., what are the weights for the nine ETFs)?

14. What is the maximum Sharpe ratio?

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