As the chief investment officer for a money management firm specializing in taxable individ-ual 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 MIXo2PortfolioStockBondER5%95%8%5%9.2251075370301016490101125a. Calculate the expected utility of each prospective portfolio for each of the two clients.b. Which portfolio represents the optimal strategic allocation for Ms. A? Which portfoliois optimal for Mr. B? Explain why there is a difference in these two outcomes.c. For Ms. A, what level of risk tolerance would leave her indifferent between havingPortfolio 1 or Portfolio 2 as her strategic allocation? Demonstrate.

a) According to the Expected Utility Theory, the formula to calculate the Expected Utility (EU) is…

Answered: As the chief investment officer for a…

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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a. Using the data provided in problem 3, determine the return and risk for a portfolio made up of the following three stocks if you want to distribute your investment as follows: 20% in ADRE; 65% in MSFT and 15% in GOOG.b. How would the portfolio be affected if you distributed your investment in the following way: 30% in ADRE; 25% on MSFT and 45% on GOOG?c. Which of the two portfolios would a risk seeking investor prefer and why?
Mr. Ota is an analyst for a large pension fund and he has been assigned the task of evaluating two different external portfolio managers (K and C). He considers the following historical average return, standard deviation, and CAPM beta estimates for these two managers over the past five years: Actual Average Standard deviation Portfolio Beta Return Manager K Manager C 7.80% 10.05% 0.75 12.0% 15.50% 1.45 Additionally, Mr. Ota estimate for the risk premium for the market portfolio is 5.40% and the risk-free rate is currently 2.50%. a. For both Managers K and C, calculate the expected return using the CAPM. Express your answers to the nearest basis point (i.e., xX.XX%)
As an individual investor, you have three funds to invest into. The first is an equity fund, the second is a corporate bond fund, and the third is a T-bill money-market fund (your risk-free asset). Fund Expected rate of return Risk (Standard deviation) Equity fund 16% 32% Corporate bond fund 12% 18% T-bill money market fund 2% Correlation between equity fund and bond fund returns is 0.4. Find the Expected return of the minimum variance portfolio formed from Equity and Bond funds
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The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column (4). (1) (2) (3) (4) Actual Actual Benchmark Index Return Weight Weight Return Equity 16% 80% 60% 10% Bonds 9% 15% 35% 7% Cash 3% 5% 5% 1% What was the manager's return in the month? What was the benchmark's return in the month? Did the manager over or under perform the benchmark? a. Over perform b. Under perform c. Equal performance d. Cannot tell from the information given e. None of the above By how much did the manager over or under perform the benchmark? What is the contribution of security selection to relative performance? What is the contribution of asset allocation to relative performance?
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Vijay
Question 1: Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. The T-bill rate is 7%. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. Stock A Stock B Stock C 1. Calculate the client expected return on the complete portfolio 2. Calculate the reward-to-variability ratio (Sharpe ratio): Part B A three-asset portfolio has the following characteristics: Expected Return Asset X Y Z 15% 10 6 Standard Deviation What is the expected return on this three-asset portfolio? 27% 33% 40% 22% 8 3 Weight 0.50 0.40 0.10
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After learning the course, you divide your portfolio into three equal parts (i.e., equal market value weights), with one part in Treasury bills, one part in a market index, and one part in a mutual fund with beta of 1.11. What is the beta of your overall portfolio?

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