You are considering an investment two mutual funds, one that tracks the investment of the US market
Question:
You are considering an investment two mutual funds, one that tracks the investment of the US market (the Russell 3000 index) and a second that tracks the investment of international market excluding the US (the MSCI All Country World ex-US Index).
For planning purposes, you construct the following estimates of annual expected returns and annual standard deviations. The correlation of the returns on the two funds is 50%.
Fund (Benchmark) Expected Return Standard Deviation
US Index (Russell 3000) 7% 20%
International Index (MSCI ex-US) 8% 22%
a. What is the return on a 60% US and 40% International portfolio?
b. What is the standard deviation on a 60% US and 40% international portfolio?
c. Assume a blended portfolio of US Index and International Index can achieve an expected return of 7.5% and a standard deviation of 17.6%.
i. Would a risk averse investor prefer the blended portfolio to investing solely in the US Index? Explain.
ii. Would a risk averse investor prefer the blended portfolio to investing solely in the International Index? Explain.
Fundamentals of Investments Valuation and Management
ISBN: 978-0077283292
5th edition
Authors: Bradford D. Jordan, Thomas W. Miller