Question i

FIN 3003 Principles (Investments 1851 Home Assignment 2 The following table presents the performance of stock and bond funds under various scenarios Scenario Probability Rate of return of Rate of return of stock fund ( 0) bond fund (%) Severe recession 0.05 -3 6 ~23 Mild recession 0'25 -10 12 Normal growth 0'50 15 6 Boom 0,20 34 4 a. Calculate the expected returns of the stock and bond funds (4 marks) h. Calculate the standard deviations of the stock and bond uids (4 marks) c. Calculate the correlation coefficient of the stock and bond funds. (2 marks) d. Suppose an investor forms a portfolio with stocks and bonds. Find the investment opportunity set in differing proportions (10 marks) Weights in Portfolio expected Portfolio standard stock fund return deviation 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 er Draw the investment opportuni f. Calculate the weight in stock eturn and standard deviation of the minimum-variance portfolio. (6 marks) hupx'llwwwaonnebemmm/lefasx |75lXIHN-3003-HmneAuignment-2pd g. Given the Tbill rate is 2%. Calculate the weight in stock fund, expected return and standard deviation of the optimal risky portfolio. (6 marks) h. Calculate the Sharpe ratio for the optimal risky portfolio (2 marks) ii Draw the capital allocation line (CAL) on the diagram in part (e) Show the position ofthe optimal risky portfolio on the CAL. (3 marks) j. Suppose an investor chooses to invest 80% of his investment fund in the optimal risky portfolio and 20% in a risk&ee asset. Calculate the expected return and standard deviation of his portfolio. (4 marks) Total: 44 mark: hupx'llwwwaounebcmmmlefasx |7SlleN-3m3-HmneAxngnmm