Determine your optimal asset allocation among ETFUS , ETFCDA , and T-bill, in percentage and in dollar amounts. Also submit an Excel file to show your work.
Suppose that you have the following utility function:
U=E(r) – ½ Aσ2 and A=3
Suppose that you have $10 million to invest for one year and you want to invest that money into ETFs tracking the S&P 500 (US) and S&P/TSX 60 (Canada) index, which are often used as proxies for the US and Canadian stock markets, respectively, and the Canadian one-year T-bill. Assume that the interest rate of the one-year T-bill is 0.35% per annum.
You have found two ETFs that you are interested in. From a set of their historical data between 2001 and 2019, you have estimated the annual expected returns, standard deviations, and covariance as follows:
ETFUS :
E(r)= 0.070584
0.173687
ETFCDA :
E(r)= 0.073763
0.16816
Covariance between ETFUS and ETFCDA = 0.02397
Answer the following questions using Excel:
- Determine your optimal asset allocation among ETFUS , ETFCDA , and T-bill, in percentage and in dollar amounts.
Also submit an Excel file to show your work.
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