Carefully read the following situation and data, and answer the questions that follow: You have recently been appointed as chief investment officer of a major charitable foundation. Its large endowment fund is currently invested in a broadly diversified portfolio of stocks (60 percent) and bond (40 percent). The foundation's board of trustees is a group of prominent individuals whose knowledge of modern investment theory and practice i superficial. You decide a discussion of basic investment principles would be helpful.
Carefully read the following situation and data, and answer the questions that follow: You have recently been appointed as chief investment officer of a major charitable foundation. Its large endowment fund is currently invested in a broadly diversified portfolio of stocks (60 percent) and bond (40 percent). The foundation's board of trustees is a group of prominent individuals whose knowledge of modern investment theory and practice i superficial. You decide a discussion of basic investment principles would be helpful.
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
Related questions
Concept explainers
Question
Transcribed Image Text:s the graph
?
nd standard
nd that it be
sky funds?
return 14%,
rd deviation-
4+4+3+6+6
15%; 13.94%;
10.21; 0.355;
75; GA 14.13%
W.
ent service
anagement.
arn a good
issues-A
respective
Market
0.30
50%
-0%
FIN 633: Investment Management 103
You believe that the addition of other assets classes to the endowment portfolio would
improve the portfolio by reducing risk and enhancing return. You are aware that depressed
conditions in real estate market are providing opportunities for property acquisition at levels
investment in real estate would be both appropriate and timely, and have decided to
of expected return that are unusually high by historical standards. You believe that an
recommend a 20 percent position be established with funds taken equally from stocks and
bonds (10 percent from stock and 10 percent from bonds).
Preliminary discussions revealed that several trustees believe real estate is too risky to
include in the portfolio. The board chairman, however, has scheduled a special meeting for
further discussion of the matter and has asked to provide background information that will
To assist you, the following expectation data have been developed:
clarify the risk issue.
Correlation Matrix
Bonds Real Estate
Asset Class
Stock
Bond
Real Estate
T-Bills
Return
16%
14%
18%
8%
SD
12%
6%
14%
0.0
Stock
1.00
-0.10
-0.40
0
1.00
-0.20
0
1.0
0
T-Bills
1.00
Required:
a. Calculate portfolio return and standard deviation of current portfolio (i.e. 60 percent in
stock and 40 percent in bonds.
b. If you are asked to create minimum variance portfolio using stock and bond, what
should be the proportion of investment in stock and bond? Calculate portfolio return
and portfolio risk using the calculated weight. Compare the risk the portfolio with the
risk of the portfolio created in part 'a'.
C. Calculate portfolio risk and return that would result from the addition of real estate. Do
you observe benefit of diversification?
Ans: (a) E(Rp) = 15.2%; p = 7.36% (b) ws = 0.2222; We = 0.7778; E(Rp) = 14.44%; p = 5.14%
(c) E(Rp) = 15.80%; p = 5.43%
Makeup) 0 No 1
Transcribed Image Text:Carefully read the following situation and data, and answer the questions that
follow:
You have recently been appointed as chief investment officer of a major charitable
foundation. Its large endowment fund is currently invested in a broadly diversified portfolio
of stocks (60 percent) and bond (40 percent). The foundation's board of trustees is a group
of prominent individuals whose knowledge of modern investment theory and practice is
superficial. You decide a discussion of basic investment principles would be helpful.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education