You have £500 to invest in 5 assets whose returns are independent and normally distributed, respectively, as N(1.03,0.05), N(1.04,0.08), N (1.01, 0.01), N (1.09, 0.13) and N (1.06, 0.065), where the first value is mean and second is std. dev. At least 20% of your portfolio should be invested in the first asset, no more than 75% can be made up of second, third and fifth assets combined, and investment in the fourth asset cannot be any bigger than the first asset. Short-selling is not allowed. Consider the tradeoff model with & = 0.2.

Q: Give a definition of a "return". Why do we need to incorporate risk into return (discount rate)?

A: Investment: An investment is when money is used now with the goal of increasing its value later. In…

Q: Another name for the expected value of an investment would be: a. The mean value b. The risk-free…

A: The expected value (EV) is an anticipated value for investment at some point in the future. In…

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A: Theoretically, an investor anticipates a return of no less than the risk-free rate on any investment…

Q: What is the significance of finding the internal rate of return?

A: IRR helps to check the viability of the project. If IRR is more than Kc than Project seems to be…

Q: Conceptually, how does an investor choose his or her optimal portfolio?

A: The point where any of the ‘indifference curve’ are tangent to the efficient set of portfolios is…

Q: 1. What are some fixed-income portfolio benchmarks available and why are they used?

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Q: Consider IRR on Incremental Investment when Initial IRR Flows are equal?

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Q: Can you please elaborate on part c). Which portfolio is the recommended one?

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Q: Explain real rate of return

A: This is the raw rate of return adjusted with inflation. It is used to ascertain the effective return…

Q: How do you perceive the relationship between risk and return in the context of investment…

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Portfolio Management

Portfolio management is the process by which an investor decides that how the person will invest in a variety of assets in order to get a desired return in the future. A portfolio means a pool of assets that includes securities, bonds, and other investment instruments which helps in risk minimization of the money that has been invested. In other words, it can be said that a portfolio means a combination of assets in which an investor decides to invest their money in order to get a lump sum return in the future or even a series of cash flow that the person is expecting at the end of their job life.