
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
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 nowThis is a popular solution!
Step by stepSolved 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.Similar questions
- Topic: Exploring the Growing Popularity of Mutual Funds in US Capital Markets Explain why this topic is interesting in the field of business. What is the brief history of the problem? This consists of a summary and results of prior research articles Finally, the learner needs to demonstrate why this proposed study is needed for academic research. Explain why it will expand academic literature, contribute to society, or the professional environment. Who is the intended audience for this research? Dear Expect please note the topic highlighted above as a guideline for answering the questions that follow. This is a dissertation.Thank you.arrow_forwardA financial services company is considering investing in a new fintech startup that has developed a new technology platform for investment management. The company is concerned about the risks associated with the investment and wants to evaluate the potential return on investment. You have been hired as a consultant to help the company make an informed decision. Which of the following financial ratios would be most appropriate for the financial services company to evaluate the financial health and performance of the fintech startup? Gross profit margin Debt-to-equity ratio Return on investment (ROI) Price-to-earnings (P/E) ratioarrow_forwardCase Problem 1. Investment StrategyJ. D. Williams, Inc. is an investment advisory firm that manages more than $120 million in funds for its numerous clients. The company uses an asset allocation model that recommends the portion of each client’s portfolio to be invested in a growth stock fund, an income fund, and a money market fund. To maintain diversity in each client’s portfolio, the firm places limits on the percentage of each portfolio that may be invested in each of the three funds. General guidelines indicate that the amount invested in the growth fund must be between 20% and 40% of the total portfolio value. Similar percentages for the other two funds stipulate that between 20% and 50% of the total portfolio value must be in the income fund and that at least 30% of the total portfolio value must be in the money market fund. In addition, the company attempts to assess the risk tolerance of each client and adjust the portfolio to meet the needs of the individual investor. For…arrow_forward
- Which statement best defines a mutual fund? a. It is a fund set aside by a local government to lend to small firms who want to invest in projects that are beneficial to the firm and community. b. It is an institution that sells stocks and bonds on behalf of small and less known firms who would otherwise have to pay high interest to obtain credit. c. It is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of stocks and bonds. d. It is a financial market where small firms agree to sell and bonds to raise funds.arrow_forwardThe largest proportion of long-term mutual fund assets is held by A) nonfinancial corporate business B) bank trusts and estates C) life insurance firms D) the household sector E) private pension fundsarrow_forwardWhich of the following organizations/entities does a mutual fund appoint to collect money received fromthe fund's purchasers and from portfolio income, as well as to arrange for cash distributions? a) A fundcustodian. b) A fund distributer c) A fund principal. d) A fund managerarrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author: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 ProfessorPublisher: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