4. As the manager of a large, well-diversified school endowment fund, you are actively con-sidering implementing sophisticated derivative strategies to protect your fund's marketvalue in the event of a substantial decline in the overall level of equity prices. Your col-leagues have suggested that you acquire either (1) a short position in an S&P 500 Indexfutures contract or (2) a long position in an S&P index put option contract. Explain howeach of these derivative strategies would affect the risk and return of the resulting aug-mented endowment portfolio.

The manager assumes that there will be substantial decline in the price of equity. Therefore, in…

Answered: 4. As the manager of a large,…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Required information [The following information applies to the questions displayed below.] A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.5%. The probability distributions of the risky funds are: Stock fund (S) Bond fund (B) Expected Return Standard Deviation 15% 9% 34% 25% The correlation between the fund returns is 0.13. Required: What is the Sharpe ratio of the best feasible CAL? (Do not round intermediate calculations. Round your answer to 4 decimal places.) Sharpe ratio
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A pension fund manager is considering investing in two funds to be included in the pension plan’s current portfolio, which is a well-diversified portfolio as proxied by the Russell 3000 index. The first fund under consideration is a growth stock fund, the second a value stock fund. The expected return, standard deviation, standard deviation of residuals, and beta of the funds are as follows: Expected return Standard Deviation Beta Standard deviation of residuals Growth fund (G) 10% 20% 1.1 12% Value fund (V) 12% 12% 1.6 20% The correlation between the two fund returns is .80. The market risk premium is expected to be 6% and the risk-free rate is 1%. Determine and explain which fund should be included in the pension fund’s current portfolio. Justify your answers with a risk-adjusted performance measure and show all your work.
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As the chief investment officer for a money management firm specializing in taxable individual investors, you are trying to establish a strategic asset allocation for two different clients. You have established that Ms. A has a risk-tolerance factor of 8, while Mr. B has a risk-tolerance factor of 27. The characteristics for four model portfolios follow: ASSET MIX Portfolio Stock Bond ER σ2 1 6 % 94 % 9 % 6 % 2 25 75 10 10 3 67 33 11 14 4 88 12 12 24 Calculate the expected utility of each prospective portfolio for each of the two clients. Do not round intermediate calculations. Round your answers to two decimal places. Portfolio Ms. A Mr. B 1 2 3 4 Which portfolio represents the optimal strategic allocation for Ms. A? Which portfolio is optimal for Mr. B? Portfolio represents the optimal strategic allocation for Ms. A. Portfolio is the optimal allocation for Mr. B. For Ms. A, what level of…
Bhupatbhai
Required information [The following information applies to the questions displayed below.] A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.5%. The probability distributions of the risky funds are: Expected Return 17% 11% Standard Deviation 38% 29% Stock fund (5) Bond fund (B) The correlation between the fund returns is 0.25. Required: What is the expected return and standard deviation for the minimum-variance portfolio of the two risky funds? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected return Standard deviation % %

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