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You have recently been appointed chief investment officer of a major charitable foundation in Bangladesh. Its large endowment fund is currently invested in a broadly diversified portfolio of stocks (60 percent) and bonds (40 percent). The foundation’s board of trustees is a group of prominent individuals whose knowledge of modern investment theory and practice is shallow. You decide a discussion of basic investment principles would be helpful.
a. Explain the concepts of specific risk, systematic risk, variance, covariance, standard deviation, and beta as they relate to investment management.
b. Explain the risk-return relationship in capital market aspect.
c. Include in your answer two reasons for any change you expect in portfolio risk. You may consider availability of risk-free asset in capital market.
d. Your understanding of capital market theory causes you to doubt the validity of the expected return and risk for Bangladesh capital market. Justify your skepticism.
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