J.P. Morgan Asset Management publishes information about financial investments. Overthe past 10 years, the expected return for the S&P 500 was 5.04% with a standard deviation of 19.45% and the expected return over that same period for a core bonds fund was5.78% with a standard deviation of 2.13% (J.P. Morgan asset Management, guide to theMarkets, 1st quarter, 2012). The publication also reported that the correlation betweenthe S&P 500 and core bonds is −.32. You are considering portfolio investments that arecomposed of an S&P 500 index fund and a core bonds fund.a. Using the information provided, determine the covariance between the S&P 500 andcore bonds.b. Construct a portfolio that is 50% invested in an S&P 500 index fund and 50% in a corebonds fund. In percentage terms, what are the expected return and standard deviationfor such a portfolio?c. Construct a portfolio that is 20% invested in an S&P 500 index fund and 80% investedin a core bonds fund. In percentage terms, what are the expected return and standarddeviation for such a portfolio?d. Construct a portfolio that is 80% invested in an S&P 500 index fund and 20% investedin a core bonds fund. In percentage terms, what are the expected return and standarddeviation for such a portfolio?e. which of the portfolios in parts (b), (c), and (d) has the largest expected return? whichhas the smallest standard deviation? which of these portfolios is the best investmentalternative?
J.P. Morgan Asset Management publishes information about financial investments. Over
the past 10 years, the expected return for the S&P 500 was 5.04% with a standard deviation of 19.45% and the expected return over that same period for a core bonds fund was
5.78% with a standard deviation of 2.13% (J.P. Morgan asset Management, guide to the
Markets, 1st quarter, 2012). The publication also reported that the correlation between
the S&P 500 and core bonds is −.32. You are considering portfolio investments that are
composed of an S&P 500 index fund and a core bonds fund.
a. Using the information provided, determine the covariance between the S&P 500 and
core bonds.
b. Construct a portfolio that is 50% invested in an S&P 500 index fund and 50% in a core
bonds fund. In percentage terms, what are the expected return and standard deviation
for such a portfolio?
c. Construct a portfolio that is 20% invested in an S&P 500 index fund and 80% invested
in a core bonds fund. In percentage terms, what are the expected return and standard
deviation for such a portfolio?
d. Construct a portfolio that is 80% invested in an S&P 500 index fund and 20% invested
in a core bonds fund. In percentage terms, what are the expected return and standard
deviation for such a portfolio?
e. which of the portfolios in parts (b), (c), and (d) has the largest expected return? which
has the smallest standard deviation? which of these portfolios is the best investment
alternative?
Trending now
This is a popular solution!
Step by step
Solved in 6 steps
