Ali, Benzema, Carter, Diego, and Eli are five, financially loaded, individuals. Each has put $10 million...

Transcribed Image Text:

Ali, Benzema, Carter, Diego, and Eli are five, financially loaded, individuals. Each has put $10 million at your disposal to invest. All of them have equal investment horizons. The funds can be invested by identifying portfolios that offer the best risk-adjusted returns. Information on the various projects and the money market (MM) is provided below. The projects and the MM are all independent of each other, are not divisible and cannot be postponed. The investors require a minimum return of 11% over the one-year period. Details of these possible investments (projects), the free cash flows (FCF) and economic lives are detailed below. Historical Std. Dev of FCF (%) Year Project 1 Project 2 Project 3 Project 4 Money Market (MM) Correlation coefficients of return Between projects 1 and 2 1 and 3 1 and 4 2 and 3 and 4 0 -30 -20 -30 -30 -10 (Minimum) The estimated return of the MM is fixed at 5% irrespective of how much money is invested. 0.85 0.62 0.56 FCF (SM) 1 2 12 7 12.2 2 3 6 4.5 18.1 2 and M 3 and M 12 6.2 9.2 6.6 14 Between projects and Market portfolio (M) 1 and M 4 5.1 6 5 2.87 3.97 27.6 Between projects and MM 1 and MM 0.55 0.65 2 and MM 0.63 3 and MM 0.60 4 and MM 0.40 0.40 0.45 0.55 0.65 0.60 4 and M 2 0.50 Money Market (MM) and M 3 and 4 0.76 The risk-free rate is estimated to be 3%, the market risk premium is 8% and the variance of the market portfolio, (M) return is 25%. Required: a) Identify the 2-asset portfolios you can potentially form. Clearly justify, and explain (In no more than 2 sentences) your project selection/project combination criterion. (10 points) 7 9 15 13 3 Ali, Benzema, Carter, Diego, and Eli are five, financially loaded, individuals. Each has put $10 million at your disposal to invest. All of them have equal investment horizons. The funds can be invested by identifying portfolios that offer the best risk-adjusted returns. Information on the various projects and the money market (MM) is provided below. The projects and the MM are all independent of each other, are not divisible and cannot be postponed. The investors require a minimum return of 11% over the one-year period. Details of these possible investments (projects), the free cash flows (FCF) and economic lives are detailed below. Historical Std. Dev of FCF (%) Year Project 1 Project 2 Project 3 Project 4 Money Market (MM) Correlation coefficients of return Between projects 1 and 2 1 and 3 1 and 4 2 and 3 and 4 0 -30 -20 -30 -30 -10 (Minimum) The estimated return of the MM is fixed at 5% irrespective of how much money is invested. 0.85 0.62 0.56 FCF (SM) 1 2 12 7 12.2 2 3 6 4.5 18.1 2 and M 3 and M 12 6.2 9.2 6.6 14 Between projects and Market portfolio (M) 1 and M 4 5.1 6 5 2.87 3.97 27.6 Between projects and MM 1 and MM 0.55 0.65 2 and MM 0.63 3 and MM 0.60 4 and MM 0.40 0.40 0.45 0.55 0.65 0.60 4 and M 2 0.50 Money Market (MM) and M 3 and 4 0.76 The risk-free rate is estimated to be 3%, the market risk premium is 8% and the variance of the market portfolio, (M) return is 25%. Required: a) Identify the 2-asset portfolios you can potentially form. Clearly justify, and explain (In no more than 2 sentences) your project selection/project combination criterion. (10 points) 7 9 15 13 3

Answer rating: 100% (QA)

To identify the 2asset portfolios we need to consider the risk and return characteristics of each pr... View the full answer