In addition to the information in exercise 29 on the S&P 500 and core bonds, J.P. Morgan

Question:

In addition to the information in exercise 29 on the S&P 500 and core bonds, J.P. Morgan Asset Management reported that the expected return for real estate investment trusts (REITs) was 13.07% with a standard deviation of 23.17% (J.P. Morgan Asset Management, Guide to the Markets, 1st Quarter, 2012). The correlation between the S&P 500 and REITs is .74 and the correlation between core bonds and REITs is -.04. You are considering portfolio investments that are composed of an S&P 500 index fund and REITs as well as portfolio investments composed of a core bonds fund and REITs.

a. Using the information provided here and in exercise 29, determine the covariance between the S&P 500 and REITs and between core bonds and REITs.

b. Construct a portfolio that is 50% invested in an S&P 500 fund and 50% invested in REITs. In percentage terms, what are the expected return and standard deviation for such a portfolio?

c. Construct a portfolio that is 50% invested in a core bonds fund and 50% invested in REITs. In percentage terms, what are the expected return and standard deviation for such a portfolio?

d. Construct a portfolio that is 80% invested in a core bonds fund and 20% invested in REITs. In percentage terms, what are the expected return and standard deviation for such a portfolio?

e. Which of the portfolios in parts (b), (c), and (d) would you recommend to an aggressive investor? Which would you recommend to a conservative investor? Why?

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...