Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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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%
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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
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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
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.
expand button
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.
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