You have recently been appointed chief investment officer of a major charitable foundation Its large endowment fund is currently invested in a broadly diversified portfolio of stocks (60 percent) and bonds (40 percent) The foundation 's board of trustees is a group of prominent individuals whose kn...

a The concepts are explained as follows The Foundations portfolio currently holds a number of securities from two asset classes Each of the individual securities has its own risk and return characteri ...

You have recently been appointed chief investment officer of a major charitable foundation. Its large endowment fund

Question:

You have recently been appointed chief investment officer of a major charitable foundation. Its large endowment fund is currently invested in a broadly diversified of stocks (60 percent) and bonds (40 percent). The foundation's board of trustees is a group of prominent individuals whose knowledge of modern investment theory and practice is superficial. You decide a discussion of basic investment principles would be helpful.
a. Explain the concepts of specific risk, systematic risk, variance, covariance, standard deviation, and beta as they relate to investment management.
You believe that the addition of other asset classes to the endowment would improve the by reducing risk and enhancing return. You are aware that depressed conditions in U.S. real estate markets are providing opportunities for property acquisition at levels of that are unusually high by historical standards.
You believe that an investment in U.S. real estate would be both appropriate and timely, and have decided to recommend a 20 percent position be established with funds taken equally from stocks and bonds.
Preliminary discussions revealed that several trustees believe real estate is too risky to include in the The board chairman, however, has scheduled a special meeting for further discussion of the matter and has asked you to provide background information that will clarify the risk issue.
To assist you, the following expectational data have been developed:

b. Explain the effect on both portfolio risk and return that would result from the addition of U.S. real estate. Include in your answer two reasons for any change you expect in portfolio risk.
c. Your understanding of capital market theory causes you to doubt the validity of the expected return and risk for U.S. real estate. Justify your skepticism.

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...