As the chief investment officer for a money management firm specializing in taxable individ- ual investors, you are trying to establish a strategic asset allocation for two different clients. You have established that Ms. A has a risk-tolerance factor of 8, while Mr. B has a risk- tolerance factor of 27. The characteristics for four model portfolios follow: ASSET MIX o2 Portfolio Stock Bond ER 5% 95% 8% 5% 9. 2 25 10 75 3 70 30 10 16 4 90 10 11 25 a. Calculate the expected utility of each prospective portfolio for each of the two clients. b. Which portfolio represents the optimal strategic allocation for Ms. A? Which portfolio is optimal for Mr. B? Explain why there is a difference in these two outcomes. c. For Ms. A, what level of risk tolerance would leave her indifferent between having Portfolio 1 or Portfolio 2 as her strategic allocation? Demonstrate.

As an individual investor, you have three funds to invest into. The first is an equity fund, the second is a corporate bond fund, and the third is a T-bill money-market fund (your risk-free asset).   Fund   Expected rate of return   Risk (Standard deviation)   Equity fund   16%   32%   Corporate bond fund   12%   18%   T-bill money market fund   2%   Correlation between equity fund and bond fund returns is 0.4.   Find the Expected return of the minimum variance portfolio formed from Equity and Bond funds

(c)) Discuss the following graphic, which shows the relationship between expected return and portfolio weights. The portfolio is comprised of a debt security D and an equity security E. What would the portfolio strategy be when Wp = 2 and ba WE = -1? 38 (33) -0.5 Expected Return 13% 8% Debt Fund 0 (ebenso) esenicut adol leu@ ledol (loorba (ognerloxel) Ismet tametnl Equity Fund 1.0 0 OC) becida nieu to 2.0 w (stocks) AB -1.0 68 XO.YOUTS RO w (bonds)=1-w (stocks) 15 V10 anollesup Figure 7.3 Portfolio expected return as a function of investment proportions la 21101TO

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column (4). (1) (2) (3) (4) Actual Actual Benchmark Index Return Weight Weight Return Equity 16% 80% 60% 10% Bonds 9% 15% 35% 7% Cash 3% 5% 5% 1% What was the manager's return in the month? What was the benchmark's return in the month? Did the manager over or under perform the benchmark? a. Over perform b. Under perform c. Equal performance d. Cannot tell from the information given e. None of the above By how much did the manager over or under perform the benchmark? What is the contribution of security selection to relative performance? What is the contribution of asset allocation to relative performance?

An insurance fund is analysing the performance of three different fund managers A, B and C.  Each manager invests in one third of all asset classes to maintain a well diversified portfolio.   The following information is available:     A B C Market portfolio Average net return (%) 5 8 9 9 Volatility (%) 18 24 21 20 Beta 0.8 1.1 1.3     A risk free rate is established to be 2%.   Calculate for each of the fund managers the expected return using CAPM, ex post Sharpe Ratio, Treynor Ratio, M2 alpha and Jensen’s alpha. Interpret your results.

Vijay

Question 1: Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. The T-bill rate is 7%. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. Stock A Stock B Stock C 1. Calculate the client expected return on the complete portfolio 2. Calculate the reward-to-variability ratio (Sharpe ratio): Part B A three-asset portfolio has the following characteristics: Expected Return Asset X Y Z 15% 10 6 Standard Deviation What is the expected return on this three-asset portfolio? 27% 33% 40% 22% 8 3 Weight 0.50 0.40 0.10

Considering the attached set of securities and portfolio returns: Find the combination of the weights that minimizes CV of the portfolio.  How does the CV of the optimal portfolio compare with the CVs of its constituents?

Suppose Neha is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A B с D E There is a Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.50 4.50 6.50 8.50 Place the entirety of her portfolio in bonds 10.50 relationship between the risk of Neha's portfolio and its average annual return. Accept a lower average annual rate of return Sell some of her bonds and use the proceeds to purchase stocks Sell some of her stocks and use the proceeds to purchase bonds Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 20 Suppose Neha currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she chooses combination D. She wants to reduce the level of risk associated…

After learning the course, you divide your portfolio into three equal parts (i.e., equal market value weights), with one part in Treasury bills, one part in a market index, and one part in a mutual fund with beta of 1.11. What is the beta of your overall portfolio?