The fund that is recommended by Person X (financial advisor) without knowing about the client’s risk. Introduction: Portfolio refers to a set of financial investments owned by an investor. The portfolio of investments includes debentures, stocks, bonds, and mutual funds. The average return that is incurred in excess of the risk-free rate per unit of the volatility is termed as Sharpe ratio . Its measure indicates the amount of excess return that an investor incurs for an additional volatility, which the investor endures for holding a risky asset. The efficient portfolio is a particular portfolio with the maximum Sharpe ratio in an economy.

Question

Want to see the full answer?

Answer 1

Question

Chapter 11, Problem 36P

Summary Introduction

To discuss: The fund that is recommended by Person X (financial advisor) without knowing about the client’s risk.

Introduction:

Portfolio refers to a set of financial investments owned by an investor. The portfolio of investments includes debentures, stocks, bonds, and mutual funds.

The average return that is incurred in excess of the risk-free rate per unit of the volatility is termed as Sharpe ratio. Its measure indicates the amount of excess return that an investor incurs for an additional volatility, which the investor endures for holding a risky asset. The efficient portfolio is a particular portfolio with the maximum Sharpe ratio in an economy.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Assume the risk-free rate is 4%. You are a financial advisor, and must choose one of the funds below to recommend to each of your clients. Whichever fund you recommend, your clients will then combine it with risk-free borrowing and lending depending on their desired level of risk. Expected Return Volatility Fund A 7% 3% Fund B 10% 4% Fund C 9% 4% Which fund would you recommend without knowing your client's risk preference?

As an individual investor, you have three funds to invest into. The first is an equity fund, the second is a corporate bond fund, and the third is a T-bill money-market fund (your risk-free asset). Fund Expected rate of return Risk (Standard deviation) Equity fund 16% 32% Corporate bond fund 12% 18% T-bill money market fund 2% Correlation between equity fund and bond fund returns is 0.4. Find the Expected return of the minimum variance portfolio formed from Equity and Bond funds

Consider the following risk-return characteristics for funds A and B: Expected return Risk Fund A (Equity) 12% 20% Fund B (Debt) 9% 16% The correlation coefficient between the returns of fund A and fund B is 0.4. 1. Which Fund is riskier? Write 1 if your answer is Fund A, write 2 if your answer is Fund B, or write 3 if your answer is undetermined. 2.1 What is the weight of fund A in the minimum variance portfolio? 2.4 What is the risk of the minimum variance portfolio? 2.2 What is the weight of Fund B in the minimum variance portfolio? 2.3 What is the expected return of the minimum variance portfolio?