Question 2: This question requires you to calculate, compare and discuss two portfolios construction techniques (i) an Equal-Dollar Weighted portfolio and (ii) a Risk Parity portfolio. a) What are Risk Parity portfolio and how is this portfolio different from an Equal-Dollar weighted portfolio? Your answer should focus on the exposure to the asset classes in the portfolio? b) Calculate the volatility and return of an Equal-Dollar weighted portfolio that is invested 50% in US equities and 50% in Emerging market equities. Use the information (based on a 20 year period) provided below (all figures are in annual terms): MSCI EM Covariance RUSSELL 3000 MSCI EM RUSSELL 3000 0.02796 0.03144 0.0576 RUSSELL 3000 MSCI EM Average Return 0.105 0.146 c) Construct a Risk Parity (RP) portfolio using the two asset classes. Betas of each equity class (against the equal weighted portfolio) are as provided in the table below. Calculate the (i) weights for each equity class, (ii) return of this portfolio and (iii) the volatility of this Risk parity portfolio. Beta RUSSELL 3000 MSCI EM 0.8 1.2 d) Calculate and compare the Sharpe ratios of the two portfolios. Which portfolio construction technique provides a (i) better diversified and a (ii) more efficient portfolio. Question 2: This question requires you to calculate, compare and discuss two portfolios construction techniques (i) an Equal-Dollar Weighted portfolio and (ii) a Risk Parity portfolio. a) What are Risk Parity portfolio and how is this portfolio different from an Equal-Dollar weighted portfolio? Your answer should focus on the exposure to the asset classes in the portfolio? b) Calculate the volatility and return of an Equal-Dollar weighted portfolio that is invested 50% in US equities and 50% in Emerging market equities. Use the information (based on a 20 year period) provided below (all figures are in annual terms): MSCI EM Covariance RUSSELL 3000 MSCI EM RUSSELL 3000 0.02796 0.03144 0.0576 RUSSELL 3000 MSCI EM Average Return 0.105 0.146 c) Construct a Risk Parity (RP) portfolio using the two asset classes. Betas of each equity class (against the equal weighted portfolio) are as provided in the table below. Calculate the (i) weights for each equity class, (ii) return of this portfolio and (iii) the volatility of this Risk parity portfolio. Beta RUSSELL 3000 MSCI EM 0.8 1.2 d) Calculate and compare the Sharpe ratios of the two portfolios. Which portfolio construction technique provides a (i) better diversified and a (ii) more efficient portfolio
