Question
You are charged with managing an investment fund of $X million for 3 years. Your investment objective is to attain a terminal wealth of $15
You are charged with managing an investment fund of $X million for 3 years. Your investment objective is to attain a terminal wealth of $15 million at the end of the investment period. The annual risk-free rate is 6%, compounded semi-annually (that is, 3% for every 6-month period).
(a)If you wish to achieve a risk-free investment objective, how much should be the initial fund balance $X?
(b)Suppose the initial fund is $10 million and you are going to invest in one of the three risky assets, W, X, or Y. Suppose their price paths over the investment horizon are known as follows:
Time | Asset W | Asset X | Asset Y |
0 | $10.0 | $10.0 | $10.0 |
1 | 12.5 | 12.0 | 11.0 |
2 | 13.0 | 13.5 | 12.7 |
3 | 12.8 | 13.0 | 13.8 |
4 | 14.0 | 13.9 | 14.5 |
5 | 13.0 | 14.3 | 14.2 |
6 | 14.2 | 13.6 | 14.0 |
Which of the three risky assets would enable you to accomplish your investment objective? Explain how.
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