George Stephenson's current portfolio of $2 million is invested as follows Summary of Stephenson's Current Portfolio Percent of Expected Annual Annual Standard Value Total Return Deviation $ 200,000 600,000 Short-term bonds 10% 4.6% 1.6% Domestic large-cap equities Domestic small-cap equities 30 12.4 19.5 1,200,000 60 16.0 29.9 Total portfolio $2,000,000 100% 13.8 23.1 Stephenson soon expects to receive an additional $2 million and plans to invest the entire amount in an index fund that best complements the current portfolio. Stephanie Coppa, CFA, is evaluating the four index funds shown in the following table for their ability to produce a portfolio that will meet two criteria relative to the current portfolio: (1) maintain or enhance expected return and (2) maintain or reduce volatility. Each fund is invested in an asset class that is not substantially represented in the current portfolio. Index Fund CharacteristicS Expected Annual Standard Deviation Correlation of Returns with Current Portfolio Index Fund Expected Annual Return Fund A 15% 25% +0,80 Fund B 11 22 +0,60 Fund C 16 25 +0.90 Fund D 14 22 +0.65 State which fund Coppa should recommend to Stephenson. Justify your choice by describing how your chosen fund best meets both of Stephenson's criteria. No calculations
George Stephenson's current portfolio of $2 million is invested as follows Summary of Stephenson's Current Portfolio Percent of Expected Annual Annual Standard Value Total Return Deviation $ 200,000 600,000 Short-term bonds 10% 4.6% 1.6% Domestic large-cap equities Domestic small-cap equities 30 12.4 19.5 1,200,000 60 16.0 29.9 Total portfolio $2,000,000 100% 13.8 23.1 Stephenson soon expects to receive an additional $2 million and plans to invest the entire amount in an index fund that best complements the current portfolio. Stephanie Coppa, CFA, is evaluating the four index funds shown in the following table for their ability to produce a portfolio that will meet two criteria relative to the current portfolio: (1) maintain or enhance expected return and (2) maintain or reduce volatility. Each fund is invested in an asset class that is not substantially represented in the current portfolio. Index Fund CharacteristicS Expected Annual Standard Deviation Correlation of Returns with Current Portfolio Index Fund Expected Annual Return Fund A 15% 25% +0,80 Fund B 11 22 +0,60 Fund C 16 25 +0.90 Fund D 14 22 +0.65 State which fund Coppa should recommend to Stephenson. Justify your choice by describing how your chosen fund best meets both of Stephenson's criteria. No calculations
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:George Stephenson's current portfolio of $2 million is invested as follows
Summary of Stephenson's Current Portfolio
Percent of
Expected Annual
Annual Standard
Value
Total
Return
Deviation
Short-term bonds
$ 200,000
10%
4.6%
1.6%
Domestic large-cap equities
Domestic small-cap equities
Total portfolio
600.000
30
12.4
19.5
1,200,000
60
16.0
29.9
$2,000,000
100%
13.8
23.1
Stephenson soon expects to receive an additional $2 million and plans to invest the entire
amount in an index fund that best complements the current portfolio. Stephanie Coppa, CFA,
is evaluating the four index funds shown in the following table for their ability to produce a
portfolio that will meet two criteria relative to the current portfolio: (1) maintain or enhance
expected return and (2) maintain or reduce volatility.
Each fund is invested in an asset class that is not substantially represented in the current
portfolio.
Index Fund Characteristics
Expected Annual
Standard Deviation
Correlation of Returns
Index Fund
Expected Annual Return
with Current Portfolio
Fund A
15%
25%
+0.80
Fund B
11
22
+0.60
Fund C
16
25
+0.90
Fund D
14
22
+0.65
State which fund Coppa should recommend to Stephenson. Justify your choice by describing how your chosen fund best meets both of Stephenson's criteria. No calculations
are required.
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Follow-up Question
Assume that Coppa recommends to Stephenson to invest the additional $2 million in
Fund D, which is a Commodity Fund. Calculate the expected return and standard
deviation of the new overall portfolio if Stephenson follows her advice.
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