Question
Why is nobody answering this question it has been posted since several days? John and Suzan has invested all their $1000 000 savings in T-bills
Why is nobody answering this question it has been posted since several days?
John and Suzan has invested all their $1000 000 savings in T-bills that pays them 5% return. Their investment advisor is not happy with their decision so he introduces them to two correlated funds with correlation of 0.10. The funds names are 'QB1' and 'QB2'. They each have 25% expected return and 40% standard deviation (risk). The investment advisor says that they should put some of their savings in each funds 'QB1' and 'QB2'. John and Suzan knows that diversification is good but they think that these two funds are identical. John thinks that he should not put all their $1000 000 in to funds with 40% risk. He says to Suzan that he can only tolerate a 10% risk.
A) If John and Suzan decide to put some of their $1 million savings in a risky fund, should they invest in both 'QB1' and 'QB2? If you think they should invest the portion they want to allocate to risky investment in just one of the two funds, identify the fund 'QB1' and 'QB2 and explain why? If you think that they should divide the risky portion of the 1 million between the two funds 'QB1' and 'QB2, explain why and how? Please provide the details of your work.
B) Assume that John and Suzan says they want to take 10% risk (measured by Standard Deviation), how would you suggest them to split their 1 million fund to achieve their target risk. Please provide the details of your work.
C) What is the expected return of John and Suzan's portfolio you come up with in part B)? Please show your work details.
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