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 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: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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