You are considering an investment two mutual funds, one that tracks the investment of the US market (the Russell 3000 index) and a second that tracks the investment of international market excluding the US (the MSCI All Country World ex-US Index).

For planning purposes, you construct the following estimates of annual expected returns and annual standard deviations. The correlation of the returns on the two funds is 50%.

Fund (Benchmark)                           Expected Return         Standard Deviation

US Index (Russell 3000)                           7%                                20%

International Index (MSCI ex-US)            8%                                 22%

a. What is the return on a 60% US and 40% International portfolio?

b. What is the standard deviation on a 60% US and 40% international portfolio?

c. Assume a blended portfolio of US Index and International Index can achieve an expected return of 7.5% and a standard deviation of 17.6%.

i. Would a risk averse investor prefer the blended portfolio to investing solely in the US Index? Explain.

ii. Would a risk averse investor prefer the blended portfolio to investing solely in the International Index? Explain.

Answer rating: 100% (QA)

a The return on a 60 US and 40 International portfolio can be calculated as Return 06 x ... View the full answer