The year is 2006. You are the manager of a university endowment and are combining stocks, bonds, and real estate funds. Your mandate is to find the optimal portfolio that has an expected return of 8% per year. What optimization problem would you try to solve?

Minimize risk for an expected portfolio return of 8% per year

Assume you only have five years of real estate fund data. The optimization from the previous problem (#19) directs you to invest 90% in real estate funds, 10% in bonds, and 0% in stocks. Which of the following is the most likely cause of the extreme weight in real estate funds?

Group of answer choices

Real estate had an unusually good five year performance through 2006

Real estate is a great investment that is overlooked by many investors so it is chronically undervalued.

Bonds have very low returns, so portfolios with high Sharpe ratios rarely contain bonds.

Stocks are very volatile, so mean-variance optimization would rarely recommend much investment in stocks.

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Question 211 pts

Which of the following is not a good potential method to the get a more reasonable portfolio than the one produced by the optimization in #20.

Group of answer choices

Obtain a longer history of real estate fund data

Identify a statistical technique that generates better estimates of expected returns than sample averages

Constrain the maximum weight on real estate

Make more reasonable assumptions about what expected returns on real estate will be going forward relative to the prior five years

Instead of aggregating stocks into a single asset, let the optimizer select from real estate funds, bonds, and individual stocks.