An investor has selected the following asset types in his portfolio. The expected return for each...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
An investor has selected the following asset types in his portfolio. The expected return for each asset type has been estimated by using the historical data: Bonds High tech stocks Foreign stocks Call options Put options Gold (i) The following table indicates the covariance matrix of the assets' returns. Each diagonal entry is the variance of an asset and non-diagonal entries are the covariances between any pairs of assets. Call options Put options (ii) Bonds Bonds High tech stocks Foreign stocks Call options Put options Gold 0.001 7% 12% 11% 14% 14% 9% Table 5: Expected returns of Investments High tech stocks 0.0003 0.009 Expected Returns Foreign stocks -0.0003 0.0004 0.008 0.00035 0.0016 0.0015 0.012 -0.00035 -0.0016 -0.0055 -0.0005 0.012 Table 6: The Covariance matrix of assets' returns Gold 0.0004 0.0006 -0.0007 0.0008 -0.0008 0.005 Suppose that our investor wishes to invest $10,000 in this portfolio. Determine how he should allocate this investment the individual assets in his portfolio in order to have a minimum baseline expected return of 11%, and at the same time, at a minimum risk. Let the solution pair be denoted by (r, e), where "r" denotes the minimized risk and "e" denotes the expected portfolio return after the problem is solved. Use successive values of 10%, 10.5%, 11%, 11.5%, 12%, 12.5%, 13% and 13.5% as the baseline return values to obtain eight pairs of solutions (r, e). Plot "e" versus "r". Explain whether there exists a pattern in this plot. In other words, explain, in your opinion, the type of mathematical relationship that "r" and "e" may have. An investor has selected the following asset types in his portfolio. The expected return for each asset type has been estimated by using the historical data: Bonds High tech stocks Foreign stocks Call options Put options Gold (i) The following table indicates the covariance matrix of the assets' returns. Each diagonal entry is the variance of an asset and non-diagonal entries are the covariances between any pairs of assets. Call options Put options (ii) Bonds Bonds High tech stocks Foreign stocks Call options Put options Gold 0.001 7% 12% 11% 14% 14% 9% Table 5: Expected returns of Investments High tech stocks 0.0003 0.009 Expected Returns Foreign stocks -0.0003 0.0004 0.008 0.00035 0.0016 0.0015 0.012 -0.00035 -0.0016 -0.0055 -0.0005 0.012 Table 6: The Covariance matrix of assets' returns Gold 0.0004 0.0006 -0.0007 0.0008 -0.0008 0.005 Suppose that our investor wishes to invest $10,000 in this portfolio. Determine how he should allocate this investment the individual assets in his portfolio in order to have a minimum baseline expected return of 11%, and at the same time, at a minimum risk. Let the solution pair be denoted by (r, e), where "r" denotes the minimized risk and "e" denotes the expected portfolio return after the problem is solved. Use successive values of 10%, 10.5%, 11%, 11.5%, 12%, 12.5%, 13% and 13.5% as the baseline return values to obtain eight pairs of solutions (r, e). Plot "e" versus "r". Explain whether there exists a pattern in this plot. In other words, explain, in your opinion, the type of mathematical relationship that "r" and "e" may have.
Expert Answer:
Answer rating: 100% (QA)
Question The investment allocation to the individual assets in his portfolio to achieve a minimal baseline expected return of 11 while minimizing risk ... View the full answer
Related Book For
Fundamentals of Financial Management
ISBN: 978-1305635937
Concise 9th Edition
Authors: Eugene F. Brigham
Posted Date:
Students also viewed these accounting questions
-
An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 9.6%. One bond, Bond C, pays an annual coupon of 10%; the...
-
Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $10,000 to invest, and the current exchange rate is $2/£. a. How many...
-
An investor wishes to invest some or all of his $12.5 million in a diversified portfolio through a commercial lender. The types of investments, the expected interest per year, and the maximum allowed...
-
Elmira, Inc had $20,000,000 of bonds outstanding on Dec 31, 2018. The ten year bonds were issued on Jan 1, 2012 for $21,000,000. Elmira can call the bonds at 102% any time after Jan 1, 2018. At the...
-
VIP Corporation engaged in the transactions that follow. Identify each transaction as (a) An operating activity, (b) An investing activity, (c) A financing activity, (d) A noncash transaction, (e)...
-
Why do both common law and equitable remedies exist? What are the differences between the two?
-
A researcher wants to test the hypothesis that births are more likely to occur on weekdays. The null hypothesis is that 17% of births occur on each of the days Monday through Friday, 10% occur on...
-
Big Bath Emporium (BBE), a private company based in Toronto, is the city's largest manufacturer and vendor of bathtubs, showers, and sinks. The company sells products direct to consumers, and also...
-
Stellar Design, a company with a 20% discount rate, is positioned for significant growth. Assuming a 25% dividend growth rate for Stellar Design over the next three years, followed by a more moderate...
-
How could the city have avoided the outcome? Explain. Do you think that it would have made sense for the city to consider the particulars of the circumstances here, such as that these were...
-
Juno Mining Company current dividend (at time 0) is $0.50 a share. Its dividend growth rate is expected to be 8% a year forever. How much would you pay for a share if your required rate of return is...
-
A pencil is set spinning in an upright position. How fast must the spin be for the pencil to remain in the upright position? Assume that the pencil is a uniform cylinder of length a and diameter b....
-
14. ABC Technology makes tablet computers which it sells for 52 per unit. The company is currently planning for the production and marketing of the product. To meet this purpose, the cost accountant...
-
register AX contains the data 35AB H. In the Intel 8086 microprocessor, suppose the What will be the contents of AX after executing the following programs? Assume that the initial content on the...
-
At the beginning of April, Winslow Toy Company budgeted 10,000 toy action figures to be manufactured in April at standard direct materials and direct labor costs as follows: Direct materials Direct...
-
Which clause must be included in MySQL 8.0? a. NOT DETERMINISTIC b. NO SQL C. d. CONTAINS SQL all of the above e. none of above
-
A cash generating unit (CGU) comprises property with a carrying amount of $400,000, plant with a carrying amount of $100,000 and goodwill with a carrying amount of $50,000. The property has a fair...
-
Using Apple, demonstrate how the differentiation strategy can be well implemented.
-
Laiho Industriess 2015 and 2016 balance sheets (in thousands of dollars) are shown. a. Sales for 2016 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and amortization were...
-
The Stewart Company has $2,392,500 in current assets and $1,076,625 in current liabilities. Its initial inventory level is $526,350, and it will raise funds as additional notes payable and use them...
-
a. You plan to make five deposits of $1,000 each, one every 6 months, with the first payment being made in 6 months. You will then make no more deposits. If the bank pays 6% nominal interest,...
-
How reliable is the model in Task 6? Task 6 An HIV researcher explored the factors that influenced condom use with a new partner (relationship less than 1 month old). The outcome measure was whether...
-
An HIV researcher explored the factors that influenced condom use with a new partner (relationship less than 1 month old). The outcome measure was whether a condom was used (use: condom used = 1, not...
-
A female who used a condom in her previous encounter scores 2 on all variables except perceived risk (for which she scores 6). Use the model in Task 6 to estimate the probability that she will use a...
Study smarter with the SolutionInn App