Question
The standard deviation and average return of the funds over the past 10 years: 10-year average return Standard deviation TD TSX Composite Index Fund 9.18%
The standard deviation and average return of the funds over the past 10 years:
10-year average return Standard deviation
TD TSX Composite Index Fund 9.18% 20.43%
TD Small-Cap Fund 14.12% 25.13%
TD Large-Company Stock Fund 8.58% 23.82%
TD Bond Fund 5.45% 9.85%
You are discussing your retirement plan with Emma Li when she mentions
that Maureen O'Brien, a representative from TD Financial Services, is visiting your oce
today. You decide that you should meet with Maureen, so Emma sets up an appointment for
you later in the day. When you sit down with Maureen, she discusses the various investment
options available in the company's retirement plan. You mention to Maureen that you
researched your new employer before you accepted your new job. Analysis of the company
has led to your belief that the company is growing and will achieve a grater market share
in the future. You also feel you should support your employer. Given these considerations,
along with the fact that you are a conservative investor, you are leaning toward investing
100% of your retirement amount in the company you now work for.
Assume the risk-free rate is the historical average T-Bill rate of 3.4%. The correlation
between the TD Large-Cap Stock Fund and the TD Bond Fund is 0.15. Note that the
spreadsheet graphing and \Solver" in Excel may assist you in answering the questions.
1. How should Maureen respond to the suggestion that you invest 100 percent of your
retirement savings in the company you now work for? What about when you say that
you are a conservative investor and that a 100 percent investment in the bond fund
may be the best alternative. Is it?
2. Using the average returns and standard deviations for the TD Large-Cap Stock Fund
and the TD Bond Fund (see the table in Problem 1), graph the opportunity set of
feasible portfolios you can form from these two risky assets. Examining the opportunity
set, notice there is a portfolio that has the lowest standard deviation. What are the
portfolio weights, expected return, and standard deviation of this minimum variance
portfolio? Why is the minimum variance portfolio important?
3. What are the portfolio weights, expected return, and standard deviation of the tan-
gency portfolio? Using this information graph the capital allocation line alongside the
opportunity set of risky assets. How does the Sharpe ratio of the tangency portfolio
compare to the Sharpe ratios of the bond fund and the large-cap stock fund?
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