Question
Questions Suppose a portfolio manager is considering asset allocation for her four clients using the following seven asset classes: US stock market, with the S&P
Questions
Suppose a portfolio manager is considering asset allocation for her four clients using the following seven asset classes:
- US stock market, with the S&P 500 index as benchmark
- UK stock market, with the FTSE 100 index as benchmark
- European stock market, with the Swiss Market Index (SMI) as benchmark
- Southeast Asian market, with the Straits Times Index (STI) as benchmark
- East Asian market, with the Hang Seng Index (HSI) as benchmark
- Japanese market, with the NIKKEI 225 index as benchmark
- Risk free assets, with an annual return of 4.1%
Capital market expectation: anticipated returns, standard deviations and correlations (all annualized) | ||||||||
| Expected ret. | Expected std. dev. | Expected correlation | |||||
S&P 500 | FTSE 100 | SMI | STI | HIS | NIKKEI 225 | |||
S&P 500 | 0.0957 | 0.1390 | 1.0000 |
| ||||
FTSE 100 | 0.0675 | 0.1401 | 0.7431 | 1.0000 |
| |||
SMI | 0.1148 | 0.1707 | 0.6643 | 0.7434 | 1.0000 |
| ||
STI | 0.0876 | 0.2409 | 0.5692 | 0.5570 | 0.4832 | 1.0000 |
| |
HSI | 0.1598 | 0.2625 | 0.5561 | 0.5559 | 0.4666 | 0.7518 | 1.0000 |
|
NIKKEI 225 | 0.0791 | 0.3220 | 0.3747 | 0.4302 | 0.3301 | 0.4236 | 0.3731 | 1.0000 |
The clients requirements are as follows.
Client 1: 10% expected return with risk not exceeding 10.5%, no short sale restrictions
Client 2: 10% expected return with risk not exceeding 10.5%, short sales are prohibited
Client 3: maximize the expected utility of E(U) = E(r) - A*Var(r) (where A=1.8), no short sale restrictions
Client 4: maximize the expected utility of E(U) = E(r) - A*Var(r) (where A=1.8), short sales are prohibited
How should the portfolio manager make asset allocation for the four clients, respectively?
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