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Assets Expected Return Standard Deviation Stock fund 14% 26% Bond fund 7% 13% The correlation coefficient between the returns of the stock fund and the bond fund is 0.45. The return on the risk-free asset is 3%. a) Calculate the risk and returns of a portfolio using proportions of the stock fund and the bond fund from 0 to 100% in increments of 25%. Tabulate your results below. Stock Fund Bond Fund 0% 100% 25% 75% 50% 50% 75% 25% 100% 0% Expected return 7% 8.75% 10.50% 12.25% 14% Standard Deviation 13% 13.94 16.95% 21.16% 26.00% b) Calculate the weights of the two assets that form the minimum variance portfolio. Also compute the expected return and standard deviation of the minimum variance portfolio c) Calculate the weights of the two assets that form the optimal risky portfolio. Also compute the expected return and standard deviation of the optimal risky portfolio. d) Use your results from parts a), b), and c to accurately draw the investment opportunity set of the two risky assets. Clearly label the Y and X axes. Indicate in the graph the location of the minimum variance portfolio and the risk free rate. Draw the capital allocation lines (CAL) for each of the five risky portfolios.. e) What is the highest attainable Sharpe ratio in the efficient frontier?.. f) Analysis: How would you convince a client to invest in your recommended portfolio?..

Assets Expected Return Standard Deviation Stock fund 14% 26% Bond fund 7% 13% The correlation coefficient between the returns of the stock fund and the bond fund is 0.45. The return on the risk-free asset is 3%. a) Calculate the risk and returns of a portfolio using proportions of the stock fund and the bond fund from 0 to 100% in increments of 25%. Tabulate your results below. Stock Fund Bond Fund 0% 100% 25% 75% 50% 50% 75% 25% 100% 0% Expected return 7% 8.75% 10.50% 12.25% 14% Standard Deviation 13% 13.94 16.95% 21.16% 26.00% b) Calculate the weights of the two assets that form the minimum variance portfolio. Also compute the expected return and standard deviation of the minimum variance portfolio c) Calculate the weights of the two assets that form the optimal risky portfolio. Also compute the expected return and standard deviation of the optimal risky portfolio. d) Use your results from parts a), b), and c to accurately draw the investment opportunity set of the two risky assets. Clearly label the Y and X axes. Indicate in the graph the location of the minimum variance portfolio and the risk free rate. Draw the capital allocation lines (CAL) for each of the five risky portfolios.. e) What is the highest attainable Sharpe ratio in the efficient frontier?.. f) Analysis: How would you convince a client to invest in your recommended portfolio?..

Essentials of Business Analytics (MindTap Course List)
Essentials of Business Analytics (MindTap Course List)
2nd Edition
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Chapter5: Probability: An Introduction To Modeling Uncertainty
Section: Chapter Questions
Problem 30P: Suppose that the return for a particular large-cap stock fund is normally distributed with a mean of...
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Assets Expected Return Standard Deviation Stock fund 14% 26% Bond fund 7% 13% The correlation coefficient between the returns of the stock fund and the bond fund is 0.45. The return on the risk-free asset is 3%. a) Calculate the risk and returns of a portfolio using proportions of the stock fund and the bond fund from 0 to 100% in increments of 25%. Tabulate your results below. Stock Fund Bond Fund 0% 100% 25% 75% 50% 50% 75% 25% 100% 0% Expected return 7% 8.75% 10.50% 12.25% 14% Standard Deviation 13% 13.94 16.95% 21.16% 26.00% b) Calculate the weights of the two assets that form the minimum variance portfolio. Also compute the expected return and standard deviation of the minimum variance portfolio c) Calculate the weights of the two assets that form the optimal risky portfolio. Also compute the expected return and standard deviation of the optimal risky portfolio. d) Use your results from parts a), b), and c to accurately draw the investment opportunity set of the two risky assets. Clearly label the Y and X axes. Indicate in the graph the location of the minimum variance portfolio and the risk free rate. Draw the capital allocation lines (CAL) for each of the five risky portfolios.. e) What is the highest attainable Sharpe ratio in the efficient frontier?.. f) Analysis: How would you convince a client to invest in your recommended portfolio?..
Transcribed Image Text:Assets Expected Return Standard Deviation Stock fund 14% 26% Bond fund 7% 13% The correlation coefficient between the returns of the stock fund and the bond fund is 0.45. The return on the risk-free asset is 3%. a) Calculate the risk and returns of a portfolio using proportions of the stock fund and the bond fund from 0 to 100% in increments of 25%. Tabulate your results below. Stock Fund Bond Fund 0% 100% 25% 75% 50% 50% 75% 25% 100% 0% Expected return 7% 8.75% 10.50% 12.25% 14% Standard Deviation 13% 13.94 16.95% 21.16% 26.00% b) Calculate the weights of the two assets that form the minimum variance portfolio. Also compute the expected return and standard deviation of the minimum variance portfolio c) Calculate the weights of the two assets that form the optimal risky portfolio. Also compute the expected return and standard deviation of the optimal risky portfolio. d) Use your results from parts a), b), and c to accurately draw the investment opportunity set of the two risky assets. Clearly label the Y and X axes. Indicate in the graph the location of the minimum variance portfolio and the risk free rate. Draw the capital allocation lines (CAL) for each of the five risky portfolios.. e) What is the highest attainable Sharpe ratio in the efficient frontier?.. f) Analysis: How would you convince a client to invest in your recommended portfolio?..
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