What is the expected return on the mutual fund

Assignment Help Financial Management

Reference no: EM131450467

Consider the following capital market: a risk-free asset yielding 2.00% per year and a mutual fund consisting of 80% stocks and 20% bonds. The expected return on stocks is 12.25% per year and the expected return on bonds is 3.25% per year. The standard deviation of stock returns is 33.00% and the standard deviation of bond returns 10.50%. The stock, bond and risk-free returns are all uncorrelated.

1. What is the expected return on the mutual fund?

2. What is the standard deviation of returns for the mutual fund? Now, assume the correlation between stock and bond returns is 0.35 and the correlations between stock and risk-free returns and between the bond and risk-free returns are 0 (by construction, correlations with the risk-free asset are always zero).

3. What is the standard deviation of returns for the mutual fund? Is it higher or lower than the standard deviation found in part 2? Why? Now, assume that the standard deviation of the mutual fund portfolio is exactly 27.75% per year and a potential customer has a risk-aversion coefficient of 2.75.

4. What correlation between the stock and bond returns is consistent with this portfolio standard deviation?

5. What is the optimal allocation to the risky mutual fund (the fund with exactly 27.75% standard deviation) for this investor?

6. What is the expected return on the complete portfolio?

7. What is the standard deviation of the complete portfolio?

8. What is the Sharpe ratio of the complete portfolio?

Reference no: EM131450467

Questions Cloud

Which party bears credit risk-long or short : Consider a 9-month forward contract established at rate of $28. which party bears credit risk, long or short?

About the bond valuation : Pybus, Inc. is considering issuing bonds that will mature in 23 years with an annual coupon rate of 7 percent.

Write a macro that uses the maverick function : FINA 5351: Finance Modeling Assignment. Write a macro that uses the Maverick function you have written in Problem I. Name your macro as MaverickCalc

List the groups of stakeholders and define each group : Identify (i.e. give it a "name") the project you have chosen for your project plan.

What is the expected return on the mutual fund : What is the expected return on the mutual fund? What correlation between the stock and bond returns is consistent with this portfolio standard deviation?

Determine the amount of tax liability : Determine the amount of tax liability in the following situations. In all cases, the taxpayer is using the filing status of married filing jointly.

Where are you on the moving walkway : Where Do You Stand? Where are you on the moving walkway?The kind of awareness a sociological imagination produces can be unsettling.

Which of given is our primary dietary source of vitamin d : Which of the following is our primary dietary source of Vitamin D? Which nutrients requires the most frequent consumption to assure adequate body stores?

Comprised of treasury bills-common stock-corporate bonds : Samantha has an investment portfolio that is comprised of Treasury bills, common stock, corporate bonds, and Treasury bonds.

User Account

All Pages