Is the investors portfolio less risky than the benchmark

Reference no: EM131237284

INVESTMENTS ASSIGNMENT

Jill Jones inheirited a large lump sum of money. This lump sum will represent the total of her investable assets and will need to be invested in a way that will support her spending needs in retirement. Jill has brought the personal finance documents you requested to the meeting, completed a risk questionnaire and spoke with you about her retirement objetives.

In preparation for the next meeting you use the information you have gathered to assess Jill's goals in light of her risk tolerance, risk perception, risk capacity, and other personal and financial circumstances. Balanceing all of these factors, you have decied that a diversified portfolio with moderate risk is the reasonable approach to sustaining Jill's spedning needs in retirement. You know that you will need to engage in extensive explanations and education to ensure that Jill will remain comfortable with the recommended portfolio over the long run.

1. Construct an optimal client portfolio by the allocation of wealth amongst risky assets and risk-free securitiies. Diversify the portfolio among a dozen asset classes instead of thousands of individual securities.

A. Refer to Table 1.0 to see nine Assets Classes, Annual Returns, Standard Deviation and Sharpe Ratios

B. Select four Asset Classes to include in the client's portfolio.

C. Determine the what percentage the Asset Class will represent in the client's portfolio.

D. Construct a weighted average for the investor's portfolio consisting of the four Classes of Assets, their weights in the portfolio , and annual returns earned.

E. Calcualte the expected weighted average return on the investor's portfolio (see Table 2.0 for an example), the Standard Deviation, and Sharpe Ratio.

2. Is the investor's portfolio less risky than the benchmark(s)?

3. Is the asset allocation strategy consistent with the client's risk tolerance?.

4. What would you say to Jill Jones to recommend the investor's portfolo?

Table 1.0 Examples of Annual Returns, Std Dev, and Sharpe Ratios

Returns & Risk 1977 to 2011	Annual Returns	Standard Deviation (Risk)*	Sharpe Ratio*
Tbills	2.8%	2.1%	1.03
Bonds	5.8%	2.9%	0.14
US Lg	5.7%	20.4%	0.17
US Sm	6.2%	20.6%	0.28
REITS	9.2%	22.7%	0.02
Intl Lg	3.4%	23.1%	0.11
Intl Sm	6.0%	28.1%	0.11
EM	7.1%	38.5%	0.24
Portfolio	6.6%	15.5%	0.24

Higher standard deviation indicates higher volatiity of returns.

** The Sharpe Ratio measures return and riskefficiency. A higher number indicates better risk adjusted performance.

Table 2.0 Weighted Average Returns in Example Portfolo

Selected Asset Classes	Weight in Portfolio	Return
US Lg	40%	1.12%
Bonds	30%	1.74%
Intl Sm	20%	1.20
EM	10%	.71%
Portfolio	100%	4.77%

Reference no: EM131237284

Questions Cloud

What opportunities are there for an arbitrageur : Give an intuitive explanation of why the early exercise of an American put becomes more attractive as the risk-free rate increases and volatility decreases.

Is the pareto efficiency satisfied at the price ceiling : Suppose the government imposes a price ceiling for rental apartment s at 70% of the current market price. What is a main reason for this type of price control? Is the Pareto efficiency satisfied at the price ceiling? Explain

What is the speedometer reading of the car in km/h : A 60-kg student traveling in a car with a constant velocity has a kinetic energy of 1.2 104 J. What is the speedometer reading of the car in km/h? What is the kinetic energy of a 20-kg dog that is running at a speed of 9.0 m/s (about 20 mi/h)?

People expecting the stock will have next year : To be consistent with no arbitrage possibilities, what price are people expecting the stock will have next year? Explain. What about 2 years?

Is the investors portfolio less risky than the benchmark : Is the investor's portfolio less risky than the benchmark(s)? Is the asset allocation strategy consistent with the client's risk tolerance? What would you say to Jill Jones to recommend the investor's portfolo?

What is the kinetic energy in joules of a 1000-kg automobile : How much work would have to be done to bring a 1000-kg automobile traveling at 90 km/h to a stop?

What is the price of a european put option : The price of a European call that expires in 6 months and has a strike price of $30 is $2. - What is the price of a European put option that expires in 6 months and has a strike price of $30?

Cost-minimizing mix of capital and labor : Is Doughdaddy using the cost-minimizing mix of capital and labor to produce doughnuts? If he wants to increase output, should he use relatively more capital or relatively more labor?

What is the price of a european put option : Explain the arbitrage opportunities in Problem if the European put price is $3. - What is the price of a European put option that expires in 6 months and has a strike price of $30?

User Account

All Pages