Portfolio Analysis

Use the three portfolios shown below to answer questions 5-8 in Part 2.

Portfolio 1

Security Amount Invested Expected Return Beta

Security A $4,000 9% .80

Security B $5,000 12% 1.15

Security C $ 12,000 14% .95

Security D $8,000 15% 1.23

Portfolio 2

Security Amount Invested Expected Return Beta

Security A $3,000 16% 1.22

Security B $ 11,000 13% 1.54

Security C $9,000 8% .87

Security D $6,000 11% .81

Portfolio 3

Security Amount Invested Expected Return Beta

Security A $15,000 10% 1.72

Security B $12,000 9% .81

Security C $ 3,000 12% .72

Security D $ 2,000 15% 1.54

Based on beta, which portfolio has thehighestlevel of systematic risk? Show your work.

If the risk-free rate is 5.5 percent, which of these portfolios has thehighestreward-to-risk ratio? Show your work.

Suppose that the risk-free rate is 5.5 percent, the return over three years for each portfolio matches its expected return, and the portfolios have 3-year annual return standard deviations as follows:

Portfolio 1 22%

Portfolio 2 26%

Portfolio 3 18%

If you were restricted to selecting one of the three portfolios to invest all your money in, which should you choose based on that portfolio having the best ratio of excess return per unit of total risk as measured by its Sharpe ratio?

Suppose that the actual returns for Portfolios 1, 2, and 3 were as follows:

Portfolio 1 11.3

Portfolio 2 12.5

Portfolio 3 9.4

Also, assume that the risk-free rate was 5.5 percent and the average return on the market portfolio was 8 percent.

Which of the three portfolios has thehighestJensen's alpha? Show your work.

Which has thehighestTreynor ratio? Show your work.

PART 3 Selecting a Portfolio

Use the two portfolios shown in the tables below to answer the questions in Part 3.

Portfolio 1

Asset Category Percentage of Portfolio

U.S. small-company stocks 5

U.S. large-company stocks 10

International stocks 5

U.S. government bonds 50

U.S. corporate bonds 30

Portfolio 2

Asset Category Percentage of Portfolio

U.S. small-company stocks 20

U.S. large-company stocks 30

International stocks 25

U.S. government bonds 15

U.S. corporate bonds 10

In your role as a financial advisor, you're advising a client, Sally, a 30-year old computer programmer who makes an above-average salary. She's investing money in her 401(k) that she doesn't plan to use until retirement. In your opinion, which of the two portfolios above would be most appropriate for these funds? In your answer, explain why you believe the portfolio you've chosen is appropriate and explain why the portfolio you didn't choose isnotappropriate.

In your role as a financial advisor, you're advising a client, Bob, who has just retired and rolled over his 401(k) into a self-directed IRA account. Bob intends to use these funds to provide income to live on in his retirement. In your opinion, which of the two portfolios above would be most appropriate for these funds? In your answer, explain why you believe the portfolio you've chosen is appropriate and explain why the portfolio you didn't choose isnotappropriate.