Problem 2 (24 points). Let us assume that there are 5 stocks and 5 bonds available in the market. The historical data are reported in the attached Excel files. You are a wealth manager, and you should propose a portfolio by using the given asset classes. After a quick interview, you obtain some information about your client: 1. Your client has an asset of USD 1 million with a liability of USD 500,000 (the present value) 2. The maturity of the liability is 20 years with the yield to maturity of 4%. 3. The client's investment horizon is 3 years. 4. Regarding a bond portfolio, the client wants to hedge against a change in interest 5. Regarding stock investment, your client wants to choose only one stock (because of, for example, huge transaction costs). rates Our analysis is based on status quo financial analysis. Thus, there are several strong assumptions: 1. Assume that the annual risk-free rate is expected to be 3% constantly. 2. All the coupon payments are reinvested at 5%. 3. Coupon payment dates of all the bonds are 06/30/2002, 12/31/2002, 06/30/2003, 12/31/2003, 06/30/2004, and 12/31/2004. 4. Stock dividends and bond coupons are paid semi-annually. Note that the dividend and coupon rates are quoted on an annual basis: in other words, you should divide the coupon rate (dividend rate) by 2 when you compute the income. 5. An immunization portfolio is constructed on the offering dates of the bond (02 Jan 2002). 6. Tax is not considered here. Using what we have learned, propose an asset allocation strategy. Specifically, 1. Propose the weight on each asset class 2. Calculate the return on the aggregate portfolio 3. Discuss risk embedded in the portfolio 4. Evaluate your portfolio performance using several measures Problem 2 (24 points). Let us assume that there are 5 stocks and 5 bonds available in the market. The historical data are reported in the attached Excel files. You are a wealth manager, and you should propose a portfolio by using the given asset classes. After a quick interview, you obtain some information about your client: 1. Your client has an asset of USD 1 million with a liability of USD 500,000 (the present value) 2. The maturity of the liability is 20 years with the yield to maturity of 4%. 3. The client's investment horizon is 3 years. 4. Regarding a bond portfolio, the client wants to hedge against a change in interest 5. Regarding stock investment, your client wants to choose only one stock (because of, for example, huge transaction costs). rates Our analysis is based on status quo financial analysis. Thus, there are several strong assumptions: 1. Assume that the annual risk-free rate is expected to be 3% constantly. 2. All the coupon payments are reinvested at 5%. 3. Coupon payment dates of all the bonds are 06/30/2002, 12/31/2002, 06/30/2003, 12/31/2003, 06/30/2004, and 12/31/2004. 4. Stock dividends and bond coupons are paid semi-annually. Note that the dividend and coupon rates are quoted on an annual basis: in other words, you should divide the coupon rate (dividend rate) by 2 when you compute the income. 5. An immunization portfolio is constructed on the offering dates of the bond (02 Jan 2002). 6. Tax is not considered here. Using what we have learned, propose an asset allocation strategy. Specifically, 1. Propose the weight on each asset class 2. Calculate the return on the aggregate portfolio 3. Discuss risk embedded in the portfolio 4. Evaluate your portfolio performance using several measures
