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##### For a clients portfolio, you have determined a required return of 6% not

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1. For a clients portfolio, you have determined a required return of 6% not accounting;for inflation. You expect inflation to average 3% over the relevant time horizon.;a.;State the required return using an additive method to account for inflation.;Score;pts;out of;1a;2;1b;2;1c;2;b. State the required return using a compounded (multiplicative) method to account;for inflation.;c. The funds you plan to use have an average expense ratio of 0.5%. State the required;return using a compounded method to account for inflation and expenses.;<< Answer #1a;<< Answer #1b;<< Answer #1c;Green area is for answer(s);ISBN-13: 978-0-470-08014-6;Maginn, J., Tuttle, D., McLeavey, D., & Pinto, J. (2007). Managing investment portfolios: A dynamic process (3rd ed.). Hoboken, New Jersey: John Wiley & Sons.;2. You have three clients for whom you have quantified risk aversion, RA, using a;questionnaire. Results are shown in Table 2.1 below. Five possible allocations, A through;E, are given in Table 2.2 below.;Score;pts;out of;2a;4;2b;2;2c;2;a. Use Um = E(Rm) 0.005RA2m to find the expected utility for each allocation and;each investor. Round to two decimal places. Put your answers in Table 2.3 below.;b.;Highlight the best portfolio for each investor.;c. Intuitively explain your results. Make sure you are *explaining* the result and not just;stating the result. Type your answer in Box 2.4;Investor;Gary;Helen;Ivan;Table 2.1;Risk aversion;high;average;low;RA;Box 2.4 for explanation (#2c).;7;4;2;Table 2.2;Allocation;A;B;C;D;E;Allocation;A;B;C;D;E;Expected Return;6.00;7.00;9.00;10.00;12.00;U Gary;Standard;Deviation;8.00;9.00;12.00;14.20;17.50;Table 2.3;U Helen;U Ivan;Green areas are for answers;ISBN-13: 978-0-470-08014-6;Maginn, J., Tuttle, D., McLeavey, D., & Pinto, J. (2007). Managing investment portfolios: A dynamic process (3rd ed.). Hoboken, New Jersey: John Wiley & Sons.;3. You have another client, Jill, who wants to minimize the probability that her portfolio;return will fall below 2%.;a. Using the allocations A through E in Table 3.1 below, calculate the safety-first ratio for;each portfolio. Round to three decimal places. Put your results in the column marked SFR.;b.;3a;pts;out of;3;3b;1;3c;2;Highlight the portfolio that is best for Jill.;c.;Score;Intuitively explain your results. Type your answer in Box 3.2.;Allocation;A;B;C;D;E;Table 3.1;Expected;Standard;Return;Deviation;6.00;8.00;7.00;9.00;9.00;12.00;10.00;14.20;12.00;17.50;SFR;Box 3.2 for explanation (#3c).;Green aeas are for answers;ISBN-13: 978-0-470-08014-6;Maginn, J., Tuttle, D., McLeavey, D., & Pinto, J. (2007). Managing investment portfolios: A dynamic process (3rd ed.). Hoboken, New Jersey: John Wiley & Sons.;4. Linda has a portfolio of U.S. assets with expected return 12% and standard deviation;10%. The risk-free rate is currently 2%. Linda is considering the addition of a foreign;mutual fund with expected return 15%, standard deviation 20%, and a correlation of 0.4;to her U.S. assets.;a.;pts;out of;4a;2;4b;2;4c;2;4d;2;Find the Sharpe ratio of the existing U.S. portfolio.;b.;Score;Find the Sharpe ratio of the foreign mutual fund.;c. Using the appropriate formula, determine if the foreign fund should be added to the;portfolio.;d. Note that compared to her U.S. assets, the foreign fund has a bit more return, but;much more risk, and therefore a lower Sharpe ratio. Why should it be added to the;portfolio anyway? (Because the formula says so is not a valid answer).;<< Answer #4a;<< Answer #4b;<< Answer #4c;Answer #4d;Green areas are for answers;ISBN-13: 978-0-470-08014-6;Maginn, J., Tuttle, D., McLeavey, D., & Pinto, J. (2007). Managing investment portfolios: A dynamic process (3rd ed.). Hoboken, New Jersey: John Wiley & Sons.;5. A minimum variance frontier for different combinations of different mutual funds is;shown below. Point A corresponds to a 100% allocation to the lowest risk fund, and Point;E corresponds to a 100% allocation to the riskiest fund. You can read the expected;returns and standard deviations of these portfolios from the graph. Answer the question;below using the box to the right.;a. Explain why D is a better portfolio than F. Be specific. (Don't just say "Because D is on;the frontier and F isn't.");b.;Explain why C is a better portfolio than F.;c. State the approximate expected return and standard deviation of the global minimum;variance (GMV) portfolio.;Score;Answers. Expand this box if needed.;pts;out of;#5b;#5c;#5d;d. A client choosing among the funds states that he wants the least risk possible, so he;is going to put all his money in the lowest risk fund (represented by Point A). Is it in fact;true that the action with the least risk is to contribute only to the lowest risk fund? Explain.;Green areas are for answers;ISBN-13: 978-0-470-08014-6;Maginn, J., Tuttle, D., McLeavey, D., & Pinto, J. (2007). Managing investment portfolios: A dynamic process (3rd ed.). Hoboken, New Jersey: John Wiley & Sons.;2;5b;2;5c;2;5d;#5a;5a;2;6. A client wants to know how to allocate his assets between (1) U.S. stocks, (2);Foreign stocks, (3) Corporate bonds, and (4) Government bonds. Using a portfolio;management application, together with your expectations about the performance of these;asset classes, you produce the corner portfolios as shown in table 6.1 below. The client;has a required return of 7.3%, and would like the portfolio with the least risk that will;produce the required 7.3%. Determine the percentage to allocate to each asset class. Put;your answers in the green boxes.;Score;pts;out of;Q6.;4;Total Score;0;40;Asset Classes;Corner;Portfolio;A;B;C;D;E;Client;Expected;Standard;Return;Deviation U.S. stocks;8.6%;20.0%;100.0%;7.9%;16.8%;63.5%;7.1%;14.5%;53.2%;5.5%;10.0%;0.0%;4.7%;8.2%;0.0%;7.3%;Foreign;Corporate;stocks;bonds;Govt bonds;0.0%;0.0%;0.0%;36.5%;0.0%;0.0%;37.2%;0.0%;9.6%;24.7%;43.3%;32.0%;10.9%;55.6%;33.5%;n/a;Green areas are for answers;ISBN-13: 978-0-470-08014-6;Maginn, J., Tuttle, D., McLeavey, D., & Pinto, J. (2007). Managing investment portfolios: A dynamic process (3rd ed.). Hoboken, New Jersey: John Wiley & Sons.;Using the tools in the Unit 4 learning module item Asset Allocation Tools;Determine an appropriate asset allocation for your $200,000 investment portfolio project".;Include percents or percent ranges for each assetclass(stocks, bonds, foreign, and so on).;Do not pick individual investments at this point.;Carefully explain why this asset allocation is appropriate.;AssetAllocationTools;JPMorgan Asset Allocator;Vanguard Asset Allocation Models;AAII Asset Allocation Models;Asset Allocation Calculator;ISBN-13: 978-0-470-08014-6;Maginn, J., Tuttle, D., McLeavey, D., & Pinto, J. (2007). Managing investment portfolios: A dynamic process (3rd ed.). Hoboken, New Jersey: John Wiley & Sons.

Paper#28336 | Written in 18-Jul-2015

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