1. Assuming that you are using US equity, US fixed income, international equity, international fixed income, emerging market equity and developed market fixed income ETFs and that you are provided their quarterly returns and standard deviations, explain the necessary steps to build an optimal risky portfolio. Explain the importance of the variance-covariance matrix and the Sharpe Ratio in your response. After an optimal portfolio is constructed, what is the question that one must ask to fully implement the output (what did we talk about endlessly in class)?
2. Link Prospect Theory, the average investor risk aversion coefficient (i.e., A), and the CAPM risk premium. In addition, comment on the long-term path of the CAPM risk premium (for example, is it time varying, stable, downward trending, etc.) as well as its size relative to the empirical recommendations (think equity risk premium puzzle).
3. Employing the Morningstar Equity Boxes and the semi-strong efficiency counterarguments, provide an investment philosophy and process paragraph that would explain your investment firms objectives (if your goal was to play the probabilities)
4. In discussing outlooks, what are the two questions one would ask a fixed income portfolio manager? Provide your economic and market outlook for 2022 and detail your fixed income portfolio structure. Your benchmark has a 5.8-year duration and an average A quality rating. Next, employing your economic and market outlook for 2022, detail your equity portfolio structure. Explain the pricing model you will use and the targeted Beta values (assuming the market B or factor B = 1 for each).