Question
Suppose your expectations regarding the two equity and bond fund returns are as follows: State of the Market Probability Bond fund return Equity fund return
Suppose your expectations regarding the two equity and bond fund returns are as follows:
State of the Market | | Probability | Bond fund return | Equity fund return |
Boom | | 0.35 | 5% | 25% |
Normal growth | | 0.30 | 6% | 15% |
Recession | | 0.35 | -5% | −15% |
Compute the mean and standard deviation of each fund.
The correlation coefficient between the two funds is 0.95.
If you build a portfolio with 50% in the bond fund and 50% in the equity fund, What will be the expected return and standard deviation on that portfolio?
Tbill return is 1%. Your risk aversion is 3. Lets assume you as an investor have the typical utility function. What percent of your wealth should you invest in the risk-free Tbill and what percent in the risky portfolio which is a combination of half equity fund and half bond fund?
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Investments
Authors: Zvi Bodie, Alex Kane, Alan J. Marcus
9th Edition
73530700, 978-0073530703
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