An investor is planning to invest in three unit trusts. She plans to invest 50% of...
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An investor is planning to invest in three unit trusts. She plans to invest 50% of her savings in an equity fund, 40% of her savings in a bond fund and the remainder in a cash fund. (A cash fund invests in long term deposits.) The return on the equity fund, x, follows a normal distribution, X-Normal(3%,9%%). The return on the bond fund, Y, follows a normal distribution, Y~Normal(2%,4%%). The correlation coefficient of the return of the equity and bond funds is 0.25. The return on the cash fund, z, is a constant 1%. Calculate the expected return and variance of the portfolio. Work in terms of % (not decimals). If the investor's sole intent is to maximise her long-term average return, what should she do? Explain your answer. If the investor's sole intent is to minimise her risk, what should she do? Explain your answer. An investor is planning to invest in three unit trusts. She plans to invest 50% of her savings in an equity fund, 40% of her savings in a bond fund and the remainder in a cash fund. (A cash fund invests in long term deposits.) The return on the equity fund, x, follows a normal distribution, X-Normal(3%,9%%). The return on the bond fund, Y, follows a normal distribution, Y~Normal(2%,4%%). The correlation coefficient of the return of the equity and bond funds is 0.25. The return on the cash fund, z, is a constant 1%. Calculate the expected return and variance of the portfolio. Work in terms of % (not decimals). If the investor's sole intent is to maximise her long-term average return, what should she do? Explain your answer. If the investor's sole intent is to minimise her risk, what should she do? Explain your answer.
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