The Board of Alaska Permanent Fund is reviewing a proposal to modify its reference portfolio, the risky, i.e. non-cash, portion of which currently consists of 60% global equities and 40% global bonds. Because expected returns continue to decline, the Board is considering increasing the Fund's exposure to global equities. The management of the Fund used the data below to prepare an analysis for the Board: Expected Return Standard Deviation Global Bonds 8% 7% Global Equities 12% 16% The correlation between the fund returns is 0.2. The risk-free rate is 2%. To answer the questions, prenare portfolio optimization analysis consisting of 10.portfolios in deciles of each asset. What is the Sharpe ratio of the current Reference Portfolio? Please round to 3 decimal places. If the Broad were to approve a 10 % increase in the Fund's allocation to Global Equities what would be the projected change in the Fund's expected return? Based on the nearest decile, what is the weight of equities in the minimum variance portfolio? (Show all portfolios in 10 % increment and round to the nearest increment.) What is the Sharpe ratio of the optimum portfolio? (Enter your answer as decimals rounded to 3 places.) If the Board approves an increase in the Reference Portfolio's allocation to Global Equities to 70%, will it improve the expected risk-adjusted performance of the Fund?
The Board of Alaska Permanent Fund is reviewing a proposal to modify its reference portfolio, the risky, i.e. non-cash, portion of which currently consists of 60% global equities and 40% global bonds. Because expected returns continue to decline, the Board is considering increasing the Fund's exposure to global equities. The management of the Fund used the data below to prepare an analysis for the Board: Expected Return Standard Deviation Global Bonds 8% 7% Global Equities 12% 16% The correlation between the fund returns is 0.2. The risk-free rate is 2%. To answer the questions, prenare portfolio optimization analysis consisting of 10.portfolios in deciles of each asset. What is the Sharpe ratio of the current Reference Portfolio? Please round to 3 decimal places. If the Broad were to approve a 10 % increase in the Fund's allocation to Global Equities what would be the projected change in the Fund's expected return? Based on the nearest decile, what is the weight of equities in the minimum variance portfolio? (Show all portfolios in 10 % increment and round to the nearest increment.) What is the Sharpe ratio of the optimum portfolio? (Enter your answer as decimals rounded to 3 places.) If the Board approves an increase in the Reference Portfolio's allocation to Global Equities to 70%, will it improve the expected risk-adjusted performance of the Fund?
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:The Board of Alaska Permanent Fund is reviewing a proposal to modify its reference portfolio, the
risky, i.e. non-cash, portion of which currently consists of 60% global equities and 40% global
bonds. Because expected returns continue to decline, the Board is considering increasing the
Fund's exposure to global equities. The management of the Fund used the data below to prepare
an analysis for the Board:
Expected Return
Standard Deviation
Global Bonds
8%
7%
Global Equities
12%
16%
The correlation between the fund returns is 0.2. The risk-free rate is 2%.
To answer the questions, prepare portfolio optimization analysis consisting of 10 portfolios in
deciles of each asset
What is the Sharpe ratio of the current Reference Portfolio? Please round to 3 decimal places.
If the Broad were to approve a 10% increase in the Fund's allocation to Global Equities what would
be the projected change in the Fund's expected return?
Based on the nearest decile, what is the weight of equities in the minimum variance portfolio?
(Show all portfolios in 10% increment and round to the nearest increment.)
What is the Sharpe ratio of the optimum portfolio? (Enter your answer as decimals rounded to 3
places.)
If the Board approves an increase in the Reference Portfolio's allocation to Global Equities to 70%,
will it improve the expected risk-adjusted performance of the Fund?
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