Answer the following about the standard (single period) mean variance asset allocation model. Investor X is said
Question:
Answer the following about the standard (single period) mean variance asset allocation model.
Investor X is said to require a minimum risk premium of 6% is he is to hold a portfolio with 15% annualized standard deviation instead of a risk-free portfolio without being worse off. What is his coefficient of relative risk aversion (RRA)?
Suppose the annual return volatility (standard deviation) is 20% for stocks and 8% for bonds, and the correlation between the two asset classes is 0.3. If Investor X allocates 60% of his wealth to stocks and 40% to bonds, what is the return volatility of the combined portfolio?
Consider asset allocations in a world with three asset classes - stocks, bonds and short-term riskless assets (cash). The expected annual returns are 7% for stocks and 2% for bonds; the annual return volatilities are 20% and 10%, respectively; and the correlation between stocks and bonds is minus 0.2 (- 0.2). The riskless interest rate is 1%. Assuming risk tolerance of 0.25, solve for Investor X's optimal allocations to stocks and bonds.
Maintain all the assumptions in (3) except for the expected returns. Suppose you do not know the expected returns, but you do know Investor X's allocations to stocks and bonds are 35% and 45%, respectively. How would you infer the expected returns for stocks and bonds assumed by Investor X?
Cost Management Measuring Monitoring and Motivating Performance
ISBN: 978-0470769423
2nd edition
Authors: Leslie G. Eldenburg, Susan K. Wolcott