You currently own shares in Berkshire Mutual Fund (BMF). Your broker calls and recommends vuying shares in a small-capitalization fund managed by Wonderland Investment Group (WIG). Your broker says that this fund will provide significant diversification benefits for your existing holdings. She gives you the following statistics based on the performance of the two funds over the last year. Portfolio Expected Return Standard Deviation Berkshire Mutual Fund 20% 14% Wonderland Investment Group a) Assume that you can earn an average annual yield of 8% on a risk-free security. Which of 12% 11% these funds would be the optimal fund to combine with the risk-free security? Why? b) Using the tund you selected in part (a), how much portfolio weights in the fund and the risk- free security would be required to earn a target return of 22%? Describe this position.
You currently own shares in Berkshire Mutual Fund (BMF). Your broker calls and recommends vuying shares in a small-capitalization fund managed by Wonderland Investment Group (WIG). Your broker says that this fund will provide significant diversification benefits for your existing holdings. She gives you the following statistics based on the performance of the two funds over the last year. Portfolio Expected Return Standard Deviation Berkshire Mutual Fund 20% 14% Wonderland Investment Group a) Assume that you can earn an average annual yield of 8% on a risk-free security. Which of 12% 11% these funds would be the optimal fund to combine with the risk-free security? Why? b) Using the tund you selected in part (a), how much portfolio weights in the fund and the risk- free security would be required to earn a target return of 22%? Describe this position.
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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You currently own shares in Berkshire Mutual Fund (BMF). Your broker calls and recommends buying shares in a small-capitalization fund managed by Wonderland Investment Group (WIG). Your
broker says that this fund will provide significant diversification benefits for your existing holdings. She gives you the following statistics based on the performance of the two funds over the last year.
Please don,t copy wrong answer.Write correct answer.Answer must be correct. and do all calculation. its carry huge .Answer follow image. Must show all calculation.
Transcribed Image Text:You currently own shares in Berkshire Mutual Fund (BMF). Your broker calls and recommends
vuying shares in a small-capitalization fund managed by Wonderland Investment Group (WIG). Your
broker says that this fund will provide significant diversification benefits for your existing holdings.
She gives you the following statistics based on the performance of the two funds over the last year.
Portfolio
Expected Return Standard Deviation
Berkshire Mutual Fund
20%
14%
Wonderland Investment Group
a) Assume that you can earn an average annual yield of 8% on a risk-free security. Which of
12%
11%
these funds would be the optimal fund to combine with the risk-free security? Why?
b) Using the tund you selected in part (a), how much portfolio weights in the fund and the risk-
free security would be required to earn a target return of 22%? Describe this position.
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