Assume a high net worth individual that is invested 50-50 in stocks and bonds wants to allocate 30 % of his current portfolio to hedge funds. His advisor suggests reallocating a portion of his equity investments to meet this objective. Assume the historical returns from stocks is 12%, bonds is 4% and hedge funds are 10%, and that the volatility of stocks is 12%, the volatility of bonds is 5% and the volatility of hedge funds is 6%.The correlation between stocks and bonds is .1, between stocks and hedge funds is .4 and between bonds and hedge funds is -.1. What is the original expected return and volatility? What is the new expected return and volatility? How did the change in allocation impact risk-adjusted returns?

Answer rating: 100% (QA)

Original Expected Return Expected Return 05 12 05 4 8 ... View the full answer