4. Expected returns and standard deviations of Stocks, Bonds, and Real Estate are as follows: Stocks...
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4. Expected returns and standard deviations of Stocks, Bonds, and Real Estate are as follows: Stocks Bonds Real Estate E (r) 12% 6% 7% Stocks 0.040 0.0048 0.005 COV-VAR Bonds 0.0048 0.0064 0.0012 Real Estate 0.005 0.0012 0.01 Calculate the expected return and standard deviation of a portfolio of Stocks, Bonds, and Real Estate. Assume the portfolio is comprised of all three assets, with 60 percen in Stocks, 35 percent in Bonds, and 5 percent in Real Estate. (b) Compute the Sharpe ratio for the portfolio in part (a). The risk-free interest rate is 4 percent. (c) Suppose you are considering whether to make particular changes to the benchmark portfolio in part (a). Specifically, you are considering whether to increase the real estate allocation to 10 percent and decrease the bond allocation to 25 percent. What is the Sharpe ratio for this new portfolio? How does this Sharpe ratio help you to decide whether to make changes to the portfolio in part (a)? Explain qualitatively. (d) Determine the weights in Stocks, Bonds, and Real Estate such that the total portfolio risk is minimized. 4. Expected returns and standard deviations of Stocks, Bonds, and Real Estate are as follows: Stocks Bonds Real Estate E (r) 12% 6% 7% Stocks 0.040 0.0048 0.005 COV-VAR Bonds 0.0048 0.0064 0.0012 Real Estate 0.005 0.0012 0.01 Calculate the expected return and standard deviation of a portfolio of Stocks, Bonds, and Real Estate. Assume the portfolio is comprised of all three assets, with 60 percen in Stocks, 35 percent in Bonds, and 5 percent in Real Estate. (b) Compute the Sharpe ratio for the portfolio in part (a). The risk-free interest rate is 4 percent. (c) Suppose you are considering whether to make particular changes to the benchmark portfolio in part (a). Specifically, you are considering whether to increase the real estate allocation to 10 percent and decrease the bond allocation to 25 percent. What is the Sharpe ratio for this new portfolio? How does this Sharpe ratio help you to decide whether to make changes to the portfolio in part (a)? Explain qualitatively. (d) Determine the weights in Stocks, Bonds, and Real Estate such that the total portfolio risk is minimized.
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a Expected return and standard deviation of the portfolio The expected return of the portfolio can be calculated as the weighted average of the expect... View the full answer
Related Book For
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Posted Date:
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