At the end of 2010, you decide to investigate a number of exchange-traded funds (ETFs) in an attempt to build a diversified portfolio. You believe that the energy, natural resources, and telecommunications sectors are the best in which to invest. However, you are somewhat cautious in your outlook, so you are also considering some bonds. To begin, you have gathered the total returns from some ETFs in each of these sectors.

The data are shown in the following table. Note that the first three are equity index ETFs, while AGG and IEF are bond index ETFs.

a. Calculate the average annual returns and standard deviations for each of the ETFs.
b. Which performed best on a risk/return basis during this period? Which was the worst? Use the Sharpe ratio and assume that the risk free rate was 3% during this period.
c. What is the expected return and standard deviation for an equally weighted portfolio that includes all of the ETFs, except for AGG?
d. Create an equally weighted portfolio of all the ETFs. Calculate the expected return and standard deviation of this portfolio.
e. Compare the portfolios from part c and part d. Which would you prefer to own?

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Year* 2006 2007 2008 2009 2010 IXC 20.99% 29.78% -36.79% 24.71% 11.79% IXP 33.23% 24.71% 30.84% 11.28% 11 .63% IGE 16.40% 33.46% -42.89% 37.10% 23.34% AGG 3.91% 6.61% 7.90% 3,01% 6.37% IEF 2.53% 10.38% 17.90% -6.56% 9.36% |