assets
Project Description:
construct a spreadsheet to replicate the analysis of the table. that is, assume that $10,000 is
invested in a single asset that returns 7 percent annually for twentyfive years and $2,000 is placed in five different investments, earning returns of 100 percent, 0 percent, 5 percent, 10 percent, and 12 percent, respectively, over the twentyyear time frame. for each of the questions below, begin with the original scenario presented in the table:
a. experiment with the return on the fifth asset. how low can the return go and still have the diversified portfolio earn a higher return than the singleasset portfolio?
b. what happens to the value of the diversified portfolio if the first two investments are both a total loss?
c. suppose the singleasset portfolio earns a return of 8 percent annually. how does the return of the singleasset portfolio compare to that of the fiveasset portfolio? how does it compare if the singleasset portfolio earns a 6 percent annual return?
d. assume that asset 1 of the diversified portfolio remains a total loss (–100% return) and asset two
earns no return. make a table showing how sensitive the portfolio returns are to a 1percentagepoint change in the return of each of the other three assets. that is, how is the diversified portfolio’s
value affected if the return on asset three is 4
percent or 6 percent? if the return on asset four is 9 percent or 11 percent? if the return on asset five is 11 percent? 13 percent? how does the total portfolio value change if each of the three
asset’s returns are one percentage point lower than in the table? if they are one percentage point higher?
e. using the sensitivity analysis of (c) and (d), explain how the two portfolios differ in their sensitivity to different returns on their assets. what are the implications of this for choosing
between a single asset portfolio and a diversified portfolio?
1
diversification illustration (invest $10,000 over 25 years)
investment strategy 1:
all funds in one asset
investment strategy 2:
invest equally in five different assets
number of assets 1 number of assets 5
initial investment
$10,000 amount invested per asset 2000
number of years 25 number of years 25
annual asset return 7% 5 asset returns (annual)
total accumulation at the end of time
frame: total funds $54,274.33
−100%
asset 1 return
asset 2 return 0%
asset 3 return 5%
asset 4 return 10%
asset 5 return 12%
total accumulation at the end of time frame:
asset 1 $0.00
asset 2 $2,000
asset 3 $6,772.71
asset 4 $21,669.41
asset 5 $34,000.13
total funds $64,442.25
invested in a single asset that returns 7 percent annually for twentyfive years and $2,000 is placed in five different investments, earning returns of 100 percent, 0 percent, 5 percent, 10 percent, and 12 percent, respectively, over the twentyyear time frame. for each of the questions below, begin with the original scenario presented in the table:
a. experiment with the return on the fifth asset. how low can the return go and still have the diversified portfolio earn a higher return than the singleasset portfolio?
b. what happens to the value of the diversified portfolio if the first two investments are both a total loss?
c. suppose the singleasset portfolio earns a return of 8 percent annually. how does the return of the singleasset portfolio compare to that of the fiveasset portfolio? how does it compare if the singleasset portfolio earns a 6 percent annual return?
d. assume that asset 1 of the diversified portfolio remains a total loss (–100% return) and asset two
earns no return. make a table showing how sensitive the portfolio returns are to a 1percentagepoint change in the return of each of the other three assets. that is, how is the diversified portfolio’s
value affected if the return on asset three is 4
percent or 6 percent? if the return on asset four is 9 percent or 11 percent? if the return on asset five is 11 percent? 13 percent? how does the total portfolio value change if each of the three
asset’s returns are one percentage point lower than in the table? if they are one percentage point higher?
e. using the sensitivity analysis of (c) and (d), explain how the two portfolios differ in their sensitivity to different returns on their assets. what are the implications of this for choosing
between a single asset portfolio and a diversified portfolio?
1
diversification illustration (invest $10,000 over 25 years)
investment strategy 1:
all funds in one asset
investment strategy 2:
invest equally in five different assets
number of assets 1 number of assets 5
initial investment
$10,000 amount invested per asset 2000
number of years 25 number of years 25
annual asset return 7% 5 asset returns (annual)
total accumulation at the end of time
frame: total funds $54,274.33
−100%
asset 1 return
asset 2 return 0%
asset 3 return 5%
asset 4 return 10%
asset 5 return 12%
total accumulation at the end of time frame:
asset 1 $0.00
asset 2 $2,000
asset 3 $6,772.71
asset 4 $21,669.41
asset 5 $34,000.13
total funds $64,442.25
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