Reference no: EM133076372
The Triad family of mutual funds allows investors to split their money between several portfolios managed by Triad. Portfolio C has an expected return of 10% and a standard deviation of return of 15%. Portfolio B has an expected return of 19% and a standard deviation of return of 25%. Portfolio A consists entirely of risk-free securities, and has a certain return of 4%.
Your client is leaning towards investing his money entirely in portfolioC, since he is unwilling to take the higher risk associated with portfolio B, but wants a higher return than offered by portfolio A.
(a) In your role as a Triad investment advisor, you suggest to himan alternative portfolio (consisting of a combination of A and B) that has the same standard deviation as portfolio C but a higherexpected return. If he has $200,000 to invest, how much should he invest in B and how much in A? What is his expected return in this case? (Note that since you work for Triad you cannot recommend investing in a market index fund, since this is not sold by Triad!)
(b) Sketch a risk/return diagram to help explain to him why his com-bination of risk and return is improved by this option, and why his risk has not increased. Show all four portfolios on the diagram(the original three plus your suggestion).
(c) Now assume that the correlation between portfolios B and C is 0. Find the combination of B and C that is mean-variance efficient.
That is find the "MVE" portfolio that combines these two portfolios. Calculate and report the portfolio weights in the MVE portfolio. Also calculate the expected return and standard deviation of the MVE portfolio. What is the Sharpe ratio of the MVE portfolio? How does this compare to the Sharpe ratio for portfolios B and C?
(d) Using the "MVE" portfolio and portfolio A nd a portfolio that has the same standard deviation as portfolio C but has higher expected return. What amount of money would be invested in each of the securities A, B and C to achieve this return? How does the expected return of this portfolio compare with the expected return of the portfolio you constructed in part? Why is it different?
(e) Draw a diagram that shows how considering all possible combinations of investments in the available portfolios improves the set of risk and return choices. Indicate the set of combinations that investors should prefer (e.g., those which minimize risk for a given level of return).
|
What is the gross earnings of an employee
: What is the gross earnings of an employee if he worked for 46 hours in one week at P45 an hour. He is paid one and a half times regular rate for hours worked
|
|
What is the project discounted payback period
: 1. In periods 0-4, a project has the following cash flows: -3,000, 1000, 1000, 2,186, 500. Its cost of capital is 10 percent. What is the project's DISCOUNTED p
|
|
Compute the net cash inflows using liquidity
: Selling and Administrative Expenses P1,500,000; and Income tax of 40%. Compute the net cash inflows using liquidity and yield preference theories
|
|
Find floating-rate payment in the second year
: You enter a two-year interest rate swap with annual payments and a notional principal of $100 million. At the time you enter the contract, the one-year spot rat
|
|
Determining the correlation between portfolios
: The Triad family of mutual funds allows investors to split their money between several portfolios managed by Triad. Portfolio C has an expected return of 10% an
|
|
Compute the net present value of the investment decision
: The machine has a useful life of 5 years and a salvage value of P27,500. Compute the net present value of the investment decision
|
|
What is the yield to maturity on BZ outstanding debt
: The 10-year US Treasury Bond has a yield of 1.7% and the market risk premium is estimated to be 5.4%. What is the yield to maturity on BZ's outstanding debt
|
|
Calculate the number of shares issued
: Calculate the number of shares issued and the number of shares outstanding on Jan. 1, Mar. 1, June 30, and Sept. 30, 2019
|
|
Journalize the transaction starting from December to June
: The Century Philippines Corporation has been authorized to issue 100,000 shares on December. Journalize the transaction starting from December 1 to June 20
|