The Knowles/Armitage (KA) group at Merrill Lynch advises clients on how to create a diversified investment portfolio. One of the investment alternatives they make available to clients is an All World fund composed of global stocks with good dividend yields. One of their clients is interested in a portfolio consisting of investment in the All World fund and a Treasury bond fund. The expected percent return of an investment in the All World fund is 8.70% with a standard deviation of 15.80%. The expected percent return of an investment in a Treasury bond fund is 5.10% and the standard deviation is 3.00%. The covariance of an investment in the All World fund with an investment in a Treasury bond fund is -11.7.

a. Which of the funds would be considered the more risky? Treasury stock or All world stock? And Why?

b. If KA recommends that the client invest 75% in the All World Fund and 25% in the treasury bond fund, what is the expected percent return and standard deviation for such a portfolio?

Expected return		(to 3 decimals)
Standard deviation		(to 3 decimals)

What would be the expected return and standard deviation, in dollars, for a client investing $10,000 in such a portfolio?

Expected return	$	(to the nearest cent)
Standard deviation	$	(to the nearest cent)

c. If KA recommends that the client invest 25% in the All World Fund and 75% in the treasury bond fund, what is the expected return and standard deviation for such a portfolio?

Expected return		(to 3 decimals)
Standard deviation		(to 3 decimals)

What would be the expected return and standard deviation, in dollars, for a client investing $10,000 in such a portfolio?

Expected return	$	(to the nearest cent)
Standard deviation	$	(to the nearest cent)

d. Which of the portfolios in parts (b) and (c) would you recommend for an aggressive investor? Part B or C and why?

Select your answer -larger return, lower return, larger standard deviation, or lower standard deviation

Which would you recommend for a conservative investor?

Part B or C and why?

Select your answer -larger return, lower return, larger standard deviation, or lower standard deviation