23 Jul WHAT IS THE STANDARD DEVIATION OF RETURNS FOR THE MUTUAL FUND?
vConsider the following capital market: a r Show more Question 1 Question #1: Capital Allocation: Question #1: Capital Allocation: Question #1: Capital Allocation: Question #1: Capital Allocation: Consider the following capital market: a risk-free asset yielding 1.00% per year and a mutual fund consisting of 65% stocks and 35% bonds. The expected return on stocks is 11.75% per year and the expected return on bonds is 4.25% per year. The standard deviation of stock returns is 36.00% and the standard deviation of bond returns 11.50%. The stock bond and risk-free returns are all uncorrelated. Consider the following capital market: a risk-free asset yielding 1.00% per year and a mutual fund consisting of 65% stocks and 35% bonds. The expected return on stocks is 11.75% per year and the expected return on bonds is 4.25% per year. The standard deviation of stock returns is 36.00% and the standard deviation of bond returns 11.50%. The stock bond and risk-free returns are all uncorrelated. Consider the following capital market: a risk-free asset yielding 1.00% per year and a mutual fund consisting of 65% stocks and 35% bonds. The expected return on stocks is 11.75% per year and the expected return on bonds is 4.25% per year. The standard deviation of stock returns is 36.00% and the standard deviation of bond returns 11.50%. The stock bond and risk-free returns are all uncorrelated. Consider the following capital market: a risk-free asset yielding 1.00% per year and a mutual fund consisting of 65% stocks and 35% bonds. The expected return on stocks is 11.75% per year and the expected return on bonds is 4.25% per year. The standard deviation of stock returns is 36.00% and the standard deviation of bond returns 11.50%. The stock bond and risk-free returns are all uncorrelated. Consider the following capital market: a risk-free asset yielding 1.00% per year and a mutual fund consisting of 65% stocks and 35% bonds. The expected return on stocks is 11.75% per year and the expected return on bonds is 4.25% per year. The standard deviation of stock returns is 36.00% and the standard deviation of bond returns 11.50%. The stock bond and risk-free returns are all uncorrelated. Consider the following capital market: a risk-free asset yielding 1.00% per year and a mutual fund consisting of 65% stocks and 35% bonds. The expected return on stocks is 11.75% per year and the expected return on bonds is 4.25% per year. The standard deviation of stock returns is 36.00% and the standard deviation of bond returns 11.50%. The stock bond and risk-free returns are all uncorrelated. 1. What is the expected return on the mutual fund? 1. What is the expected return on the mutual fund? 1. What is the expected return on the mutual fund? 1. What is the expected return on the mutual fund? 1. What is the expected return on the mutual fund? 2. What is the standard deviation of returns for the mutual fund? 2. What is the standard deviation of returns for the mutual fund? 2. What is the standard deviation of returns for the mutual fund? 2. What is the standard deviation of returns for the mutual fund? 2. What is the standard deviation of returns for the mutual fund? 2. What is the standard deviation of returns for the mutual fund? Now assume the correlation between stock and bond returns is 0.40 and the correlations between stock and risk-free returns and between the bond and risk-free returns are 0 (by construction correlations with the risk-free asset are always zero). Now assume the correlation between stock and bond returns is 0.40 and the correlations between stock and risk-free returns and between the bond and risk-free returns are 0 (by construction correlations with the risk-free asset are always zero). Now assume the correlation between stock and bond returns is 0.40 and the correlations between stock and risk-free returns and between the bond and risk-free returns are 0 (by construction correlations with the risk-free asset are always zero). Now assume the correlation between stock and bond returns is 0.40 and the correlations between stock and risk-free returns and between the bond and risk-free returns are 0 (by construction correlations with the risk-free asset are always zero). Now assume the correlation between stock and bond returns is 0.40 and the correlations between stock and risk-free returns and between the bond and risk-free returns are 0 (by construction correlations with the risk-free asset are always zero). Now assume the correlation between stock and bond returns is 0.40 and the correlations between stock and risk-free returns and between the bond and risk-free returns are 0 (by construction correlations with the risk-free asset are always zero). 3. What is the standard deviation of returns for the mutual fund? Is it higher or lower than the standard deviation found in part 2? Why? 3. What is the standard deviation of returns for the mutual fund? Is it higher or lower than the standard deviation found in part 2? Why? 3. What is the standard deviation of returns for the mutual fund? Is it higher or lower than the standard deviation found in part 2? Why? 3. What is the standard deviation of returns for the mutual fund? Is it higher or lower than the standard deviation found in part 2? Why? 3. What is the standard deviation of returns for the mutual fund? Is it higher or lower than the standard deviation found in part 2? Why? 3. What is the standard deviation of returns for the mutual fund? Is it higher or lower than the standard deviation found in part 2? Why? Now assume that the standard deviation of the mutual fund portfolio is exactly 26.50% per year and a potential customer has a risk-aversion coefficient of 2.50. Now assume that the standard deviation of the mutual fund portfolio is exactly 26.50% per year and a potential customer has a risk-aversion coefficient of 2.50. Now assume that the standard deviation of the mutual fund portfolio is exactly 26.50% per year and a potential customer has a risk-aversion coefficient of 2.50. Now assume that the standard deviation of the mutual fund portfolio is exactly 26.50% per year and a potential customer has a risk-aversion coefficient of 2.50. Now assume that the standard deviation of the mutual fund portfolio is exactly 26.50% per year and a potential customer has a risk-aversion coefficient of 2.50. Now assume that the standard deviation of the mutual fund portfolio is exactly 26.50% per year and a potential customer has a risk-aversion coefficient of 2.50. 4. What correlation between the stock and bond returns is consistent with this portfolio standard deviation? 4. What correlation between the stock and bond returns is consistent with this portfolio standard deviation? 4. What correlation between the stock and bond returns is consistent with this portfolio standard deviation? 4. What correlation between the stock and bond returns is consistent with this portfolio standard deviation? 4. What correlation between the stock and bond returns is consistent with this portfolio standard deviation? 4. What correlation between the stock and bond returns is consistent with this portfolio standard deviation? 5. What is the optimal allocation to the risky mutual fund (the fund with exactly 26.50% standard deviation) for this investor? 5. What is the optimal allocation to the risky mutual fund (the fund with exactly 26.50% standard deviation) for this investor? 5. What is the optimal allocation to the risky mutual fund (the fund with exactly 26.50% standard deviation) for this investor? 5. What is the optimal allocation to the risky mutual fund (the fund with exactly 26.50% standard deviation) for this investor? 5. What is the optimal allocation to the risky mutual fund (the fund with exactly 26.50% standard deviation) for this investor? 5. What is the optimal allocation to the risky mutual fund (the fund with exactly 26.50% standard deviation) for this investor? 6. What is the expected return on the complete portfolio? 6. What is the expected return on the complete portfolio? 6. What is the expected return on the complete portfolio? 6. What is the expected return on the complete portfolio? 6. What is the expected return on the complete portfolio? 6. What is the expected return on the complete portfolio? 7. What is the standard deviation of the complete portfolio? 7. What is the standard deviation of the complete portfolio? 7. What is the standard deviation of the complete portfolio? 7. What is the standard deviation of the complete portfolio? 7. What is the standard deviation of the complete portfolio? 7. What is the standard deviation of the complete portfolio? 8. What is the Sharpe ratio of the complete portfolio? 8. What is the Sharpe ratio of the complete portfolio? 8. What is the Sharpe ratio of the complete portfolio? 8. What is the Sharpe ratio of the complete portfolio? 8. What is the Sharpe ratio of the complete portfolio? 8. What is the Sharpe ratio of the complete portfolio? Question 2 Question #2: Markowitz Optimization: Question #2: Markowitz Optimization: Question #2: Markowitz Optimization: Question #2: Markowitz Optimization: Question #2: Markowitz Optimization: Open the associated Excel file named QPS2 Data Fall I 2015 Problem 2 in My Course Content: Problem Set Spreadsheets. The data file includes 60 months of returns for 11 exchange traded funds; their names and ticker symbols follow: Open the associated Excel file named QPS2 Data Fall I 2015 Problem 2 in My Course Content: Problem Set Spreadsheets. The data file includes 60 months of returns for 11 exchange traded funds; their names and ticker symbols follow: Open the associated Excel file named QPS2 Data Fall I 2015 Problem 2 in My Course Content: Problem Set Spreadsheets. The data file includes 60 months of returns for 11 exchange traded funds; their names and ticker symbols follow: Open the associated Excel file named QPS2 Data Fall I 2015 Problem 2 in My Course Content: Problem Set Spreadsheets. The data file includes 60 months of returns for 11 exchange traded funds; their names and ticker symbols follow: Open the associated Excel file named QPS2 Data Fall I 2015 Problem 2 in My Course Content: Problem Set Spreadsheets. The data file includes 60 months of returns for 11 exchange traded funds; their names and ticker symbols follow: Open the associated Excel file named QPS2 Data Fall I 2015 Problem 2 in My Course Content: Problem Set Spreadsheets. The data file includes 60 months of returns for 11 exchange traded funds; their names and ticker symbols follow: Ticker Name of Exchange Traded Fund Name of Exchange Traded Fund Name of Exchange Traded Fund 1 SPY SPDR S&P 500 ETF 2 MDY SPDR S&P MidCap 400 ETF SPDR S&P MidCap 400 ETF 3 IWM iShares Russell 2000 ETF iShares Russell 2000 ETF 4 QQQ Power Shares QQQ ETF Power Shares QQQ ETF 5 EFA iShares MSCI EAFE ETF iShares MSCI EAFE ETF 6 VWO Vanguard FTSE Emerging Markets Stock Index ETF Vanguard FTSE Emerging Markets Stock Index ETF Vanguard FTSE Emerging Markets Stock Index ETF Vanguard FTSE Emerging Markets Stock Index ETF 7 VNQ Vanguard REIT Index ETF Vanguard REIT Index ETF 8 BND Vanguard Total Bond Market ETF Vanguard Total Bond Market ETF Vanguard Total Bond Market ETF 9 PFF iShares US Preferred Stock ETF iShares US Preferred Stock ETF iShares US Preferred Stock ETF 10 GLD SPDR Gold Shares ETF SPDR Gold Shares ETF 11 JNK SPDR Barclays High Yield Bond ETF SPDR Barclays High Yield Bond ETF SPDR Barclays High Yield Bond ETF All students will do problem 2 using 9 of the above ETFs; all students will include the first 8 ETFs listed above: SPY MDY IWM QQQ EFA VWO VNQ and BND. All students will include one of the last 3 ETFs: PFF GLD and JNK as instructed on your version. All students will do problem 2 using 9 of the above ETFs; all students will include the first 8 ETFs listed above: SPY MDY IWM QQQ EFA VWO VNQ and BND. All students will include one of the last 3 ETFs: PFF GLD and JNK as instructed on your version. All students will do problem 2 using 9 of the above ETFs; all students will include the first 8 ETFs listed above: SPY MDY IWM QQQ EFA VWO VNQ and BND. All students will include one of the last 3 ETFs: PFF GLD and JNK as instructed on your version. All students will do problem 2 using 9 of the above ETFs; all students will include the first 8 ETFs listed above: SPY MDY IWM QQQ EFA VWO VNQ and BND. All students will include one of the last 3 ETFs: PFF GLD and JNK as instructed on your version. All students will do problem 2 using 9 of the above ETFs; all students will include the first 8 ETFs listed above: SPY MDY IWM QQQ EFA VWO VNQ and BND. All students will include one of the last 3 ETFs: PFF GLD and JNK as instructed on your version. All students will do problem 2 using 9 of the above ETFs; all students will include the first 8 ETFs listed above: SPY MDY IWM QQQ EFA VWO VNQ and BND. All students will include one of the last 3 ETFs: PFF GLD and JNK as instructed on your version. Version A: Include PFF and exclude GLD and JNK. Version A: Include PFF and exclude GLD and JNK. Version A: Include PFF and exclude GLD and JNK. Version A: Include PFF and exclude GLD and JNK. Version A: Include PFF and exclude GLD and JNK. Version A: Include PFF and exclude GLD and JNK. Use the data on your 9 ETFs to answer the following questions: Use the data on your 9 ETFs to answer the following questions: Use the data on your 9 ETFs to answer the following questions: Use the data on your 9 ETFs to answer the following questions: Use the data on your 9 ETFs to answer the following questions: Use the data on your 9 ETFs to answer the following questions: 1. What is the average return for each of the nine indexes? 1. What is the average return for each of the nine indexes? 1. What is the average return for each of the nine indexes? 1. What is the average return for each of the nine indexes? 1. What is the average return for each of the nine indexes? 1. What is the average return for each of the nine indexes? 2. Show the covariance matrix of returns. Briefly describe how you constructed the covariance matrix. 2. Show the covariance matrix of returns. Briefly describe how you constructed the covariance matrix. 2. Show the covariance matrix of returns. Briefly describe how you constructed the covariance matrix. 2. Show the covariance matrix of returns. Briefly describe how you constructed the covariance matrix. 2. Show the covariance matrix of returns. Briefly describe how you constructed the covariance matrix. 2. Show the covariance matrix of returns. Briefly describe how you constructed the covariance matrix. Consider the simple case where short sales are allowed but short positions must be greater than or equal to 50% and long positions must be less than or equal to 50%. Use Excel Solver to find the Minimum Variance Portfolio (MVP). Question 1 Question #1: Capital Allocation: Question #1: Capital Allocation: Question #1: Capital Allocation: Question #1: Capital Allocation: Consider the following capital market: a risk-free asset yielding 1.00% per year and a mutual fund consisting of 65% stocks and 35% bonds. The expected return on stocks is 11.75% per year and the expected return on bonds is 4.25% per year. The standard deviation of stock returns is 36.00% and the standard deviation of bond returns 11.50%. The stock bond and risk-free returns are all uncorrelated. Consider the following capital market: a risk-free asset yielding 1.00% per year and a mutual fund consisting of 65% stocks and 35% bonds. The expected return on stocks is 11.75% per year and the expected return on bonds is 4.25% per year. The standard deviation of stock returns is 36.00% and the standard deviation of bond returns 11.50%. The stock bond and risk-free returns are all uncorrelated. Consider the following capital market: a risk-free asset yielding 1.00% per year and a mutual fund consisting of 65% stocks and 35% bonds. The expected return on stocks is 11.75% per year and the expected return on bonds is 4.25% per year. The standard deviation of stock returns is 36.00% and the standard deviation of bond returns 11.50%. The stock bond and risk-free returns are all uncorrelated. Consider the following capital market: a risk-free asset yielding 1.00% per year and a mutual fun
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