An investor has selected the following asset types in his portfolio. The expected return for each...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
An investor has selected the following asset types in his portfolio. The expected return for each asset type has been estimated by using the historical data: Bonds High tech stocks Foreign stocks Call options Put options Gold (i) The following table indicates the covariance matrix of the assets' returns. Each diagonal entry is the variance of an asset and non-diagonal entries are the covariances between any pairs of assets. Call options Put options (ii) Bonds Bonds High tech stocks Foreign stocks Call options Put options Gold 0.001 7% 12% 11% 14% 14% 9% Table 5: Expected returns of Investments High tech stocks 0.0003 0.009 Expected Returns Foreign stocks -0.0003 0.0004 0.008 0.00035 0.0016 0.0015 0.012 -0.00035 -0.0016 -0.0055 -0.0005 0.012 Table 6: The Covariance matrix of assets' returns Gold 0.0004 0.0006 -0.0007 0.0008 -0.0008 0.005 Suppose that our investor wishes to invest $10,000 in this portfolio. Determine how he should allocate this investment the individual assets in his portfolio in order to have a minimum baseline expected return of 11%, and at the same time, at a minimum risk. Let the solution pair be denoted by (r, e), where "r" denotes the minimized risk and "e" denotes the expected portfolio return after the problem is solved. Use successive values of 10%, 10.5%, 11%, 11.5%, 12%, 12.5%, 13% and 13.5% as the baseline return values to obtain eight pairs of solutions (r, e). Plot "e" versus "r". Explain whether there exists a pattern in this plot. In other words, explain, in your opinion, the type of mathematical relationship that "r" and "e" may have. An investor has selected the following asset types in his portfolio. The expected return for each asset type has been estimated by using the historical data: Bonds High tech stocks Foreign stocks Call options Put options Gold (i) The following table indicates the covariance matrix of the assets' returns. Each diagonal entry is the variance of an asset and non-diagonal entries are the covariances between any pairs of assets. Call options Put options (ii) Bonds Bonds High tech stocks Foreign stocks Call options Put options Gold 0.001 7% 12% 11% 14% 14% 9% Table 5: Expected returns of Investments High tech stocks 0.0003 0.009 Expected Returns Foreign stocks -0.0003 0.0004 0.008 0.00035 0.0016 0.0015 0.012 -0.00035 -0.0016 -0.0055 -0.0005 0.012 Table 6: The Covariance matrix of assets' returns Gold 0.0004 0.0006 -0.0007 0.0008 -0.0008 0.005 Suppose that our investor wishes to invest $10,000 in this portfolio. Determine how he should allocate this investment the individual assets in his portfolio in order to have a minimum baseline expected return of 11%, and at the same time, at a minimum risk. Let the solution pair be denoted by (r, e), where "r" denotes the minimized risk and "e" denotes the expected portfolio return after the problem is solved. Use successive values of 10%, 10.5%, 11%, 11.5%, 12%, 12.5%, 13% and 13.5% as the baseline return values to obtain eight pairs of solutions (r, e). Plot "e" versus "r". Explain whether there exists a pattern in this plot. In other words, explain, in your opinion, the type of mathematical relationship that "r" and "e" may have.
Expert Answer:
Answer rating: 100% (QA)
Question The investment allocation to the individual assets in his portfolio to achieve a minimal baseline expected return of 11 while minimizing risk ... View the full answer
Related Book For
Fundamentals of Financial Management
ISBN: 978-1305635937
Concise 9th Edition
Authors: Eugene F. Brigham
Posted Date:
Students also viewed these accounting questions
-
An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 9.6%. One bond, Bond C, pays an annual coupon of 10%; the...
-
Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $10,000 to invest, and the current exchange rate is $2/£. a. How many...
-
An investor wishes to invest some or all of his $12.5 million in a diversified portfolio through a commercial lender. The types of investments, the expected interest per year, and the maximum allowed...
-
Elmira, Inc had $20,000,000 of bonds outstanding on Dec 31, 2018. The ten year bonds were issued on Jan 1, 2012 for $21,000,000. Elmira can call the bonds at 102% any time after Jan 1, 2018. At the...
-
Refer to the Baseball 2012 data, which report information on the 30 Major League Baseball teams for the 2012 season. Assume the 2012 data represents a sample. a. Develop a 95% confidence interval for...
-
Pursuant to your e-mail of the 4th, please be advised that your shipment was sent March 6. Revise the following to make the tone conversational yet professional.
-
Water flows uniformly at a depth of \(1 \mathrm{~m}\) in a channel that is \(5 \mathrm{~m}\) wide as shown in Fig. P10.63. Further downstream, the channel cross section changes to that of a square of...
-
A study of accounts receivables at the A&W Depart ment Store indicates that bills are either current, one month overdue, two months overdue, written off as bad debts, or paid in full. Of those that...
-
(a)How high (in m) a hill can a car coast up (engine disengaged) if friction is negligible and its initial speed is 86.0 km/h? (b)If, in actuality, a 750 kg car with an initial speed of 86.0 km/h is...
-
Enter the transactions for Weeks 1 5 into the appropriate Journal for the month of June 2022. Next, post all the Journal transactions to the ledger accounts as specified in the Account System...
-
Write a small program to show the difference between calling a virtual function inside a normal member function and calling a virtual function inside a constructor. The program should prove that the...
-
Give one example in which you have participated in voting where the count was tabulated by the plurality voting method. Your example can be made up or factual, but you should be specific.
-
What is the population paradox?
-
Give one example in which you have participated in voting where the count was tabulated by the Borda count method. Your example can be made up or factual, but you should be specific.
-
What is the irrelevant alternatives criterion?
-
What is the new states paradox?
-
Recreate the thermal system that was demonstrated in the laboratory session. This system includes a Thermal Mass, Convective and Conductive Heat Transfer, Temperature Sensor, Temperature Source, and...
-
Three successive resonance frequencies in an organ pipe are 1310, 1834, and 2358 Hz. (a) Is the pipe closed at one end or open at both ends? (b) What is the fundamental frequency? (c) What is the...
-
Laiho Industriess 2015 and 2016 balance sheets (in thousands of dollars) are shown. a. Sales for 2016 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and amortization were...
-
The Stewart Company has $2,392,500 in current assets and $1,076,625 in current liabilities. Its initial inventory level is $526,350, and it will raise funds as additional notes payable and use them...
-
a. You plan to make five deposits of $1,000 each, one every 6 months, with the first payment being made in 6 months. You will then make no more deposits. If the bank pays 6% nominal interest,...
-
On May 8, 1984, Hannah Motsi graduated from Louisiana State University. She set to work opening a coffee shop in Baton Rouge called HannaH and found a perfect location in a new development. Using a...
-
How does the firms WACC (with taxes) change with leverage?
-
Assume that Microsoft has no debt, a total market value of $2 trillion, and a marginal tax rate of 21%. If it permanently changes its leverage from no debt by taking on new debt in the amount of 13%...
Study smarter with the SolutionInn App