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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Transcribed Image Text:The following data apply to Problems 4 through 10: A pension fund manager is considering three mutual funds.
The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that
provides a safe return of 8%. The characteristics of the risky funds are as follows:
Stock fund (S)
Bond fund (B)
Expected Return Standard Deviation
20%
12
30%
15
The correlation between the fund returns is .10.
4 What are the investment proportions in the minimum-vauriance portfolio of the two risky funds, and what are
the expected galue and standard deviation of its rate of return?
5. Tabulate and draw the investment opportunity set of the two Fisky funds. Use investment proportions for the
stock fund of 0% to 100% mer
wew hou die
return and standard deviation of the optimal portfolio?
7. Solve numerically for the proportions of each asset and for the expected return and standard
deviation of the optimal risky portfolio.
8. What is the Sharpe ratio of the best feasible CAL?
You require that your portfolio yield an expected return of 14%, and that it be efficient, that is, on the
steepest renolble CAL
a. What is the standard deviation of your portfolio?
b. What is the propertion invested in the money market fund and each of the two risky funds?
portunity set. What does your graph show for the expected
Page 222
10. If you were to use only the two taky funds and still require an expected return of 14%, what would be the
investment proportions of your portfolio? Compare its standard deviation to that of the optimized portfolio
in Problem 9. What do you conclude?
11. Steeks offer an expected rate of return of 18% with a standard deviation of 22%. Geld offers an expected
return of 10% with a standard deviation of 30%.
a. In light of the apparent inferiority of gold with respect to both mean return and volatility, would anyone
hold gold? If so. demonstrate graphically why one would de so.
b. Given the data above, Teanswer (a) with the additional assumption that the correlation coefficient
between gold and stocks equals 1. Draw a graph illustrating why one would or would not hold gold in
one's portfotio.
12. Suppose that there are many stocks i
given as follows:
c. Could the set of assumption in part (9) for expected returns, standard deviations, and correlation
represent an equilibrium for the security market?
ecurity market and that the characteristics of stocks A and B are
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