360 Words1 Page

1.To maximize the bond portfolio, one has to accept that there is such a thing as a worst case scenario. That would be dependent on the upper ceiling of interest rates, of which there is none. In addition, bonds can be held to maturity for face value, so there is no need at all for the worst case scenario to come to pass.
Once these situations have been accepted, we can use the Solver function in Excel to answer the three questions.
Expected Worst Case Weighted Weighted Weighted Bond Return Return Duration Weight Return Duration Worst Case 1 12.50% 8% 8 40% 0.050 3.200 0.032 2 11.50% 7.50% 7 25% 0.029 1.750 0.019 3 10.50% 6.80% 6 0% 0.000 0.000 0.000 4 9.50% 7% 5 0% 0.000 0.000 0.000 5 8.50% 7.40% 3 35% 0.030 1.050 0.026 1.000 0.109 6.000 0.077 Face 1,000,000 Expected return 10.85% Avg worst case return 7.67% Avg duration 6
The maximum return on the $1 million investment, given the constraints, is 10.85%. This is achieved with the following mix: 40% in Bond 1, 35% in Bond 5 and 25% in Bond 2.
Qualitatively, the pattern is pretty straightforward. To maximize return, the bond with the highest return is given the most weight up to the constraint point. Then the next highest bond would be given the same. However, the constraint on maximum duration means that the one bond significantly lower than the average duration constraint threshold must be added to counterbalance Bond 1. Thus, the split between Bond 2 and Bond 5 is determined by the duration threshold, where as much

Related

## Risk Reduction by Diversification of Porfolio

1346 Words | 5 PagesOver a long time horizon researchers have contradictory views about investment in portfolio, are “Put all your eggs in one basket” and “Don’t put all your eggs in one basket”. The latter one is supported by many and known as diversification [7]. Diversification is associated with reducing risk and maximizing returns of investors and portfolio managers i.e. risk-return trade off. An investor gets benefitted by spreading his scarce resources over various assets [2, 8] which maximizes return and minimizes

## The Roles of Risk Free Rate

1020 Words | 4 Pagesarbitrarily use government bonds, as benchmarks for the risk-free asset (Fleming 2000). The 43% of related bibliography considers T-Bills as the appropriate risk-free asset, in contrast with the outstanding 29%, which indicates long-term Treasury bonds as the most valid ones (Burner et al. 1998). Additionally, the annualized yield of a monthly T-bill is also characterized as the proper risk-free rate (Campbell et al. 2001, Thomson Reuters 2013). Therefore, for the purposes of this study the average monthly

## Modern Portfolio Theory Adaptations ( Pmpt )

1267 Words | 6 PagesModern Portfolio Theory Adaptations MPT correlates the distribution of assets to the risk of investments. This theory also acknowledges an investors aversion to risk and required return rates (Geambasu, Sova, Jianu, & Geambasu, 2013). Moreover, MPT emphasizes the importance of diversifying as much as possible to eliminate risk. In order to measure the risk of an investment MPT relies on the standard deviation of all returns (Chambers, 2010). However, due to new analysis suggesting that MPT produces

## Assessing Risks with International Diversification Essay

1674 Words | 7 PagesAssessing Risks with International Diversification I believe that all investors hope to get a higher than expected return on their investment at a minimum downside risk. Investing in global markets has begun to make sense for an increasing number of investors as U.S. equities only make up less than 40 percent of world equities and an even small fraction of the total world wealth (Bodie, Kane &Marcus, 2014).By 2011, more than 50 countries had an aggregated market capitalization of $1 billion and above

## Financial Market And Capital Market Essay

2444 Words | 10 Pages1.5 FINANCIAL MARKET A financial market is a market that brings buyers and seller together to trade in financial assets such as securities bonds commodities derivatives and currencies. The purpose of a financial market is to set prices for global trade raise capital and transfer liquidity and minimize the risk. There are many components to a financial market. Money market and capital markets are mostly used as components of financial market. A. MONEY MARKET Money market is used for a short-term basis

## Different Types Of Mutual Funds

1450 Words | 6 Pagesthe next step lies in understanding the price and how it is determined. The income of mutual funds is generally acquired in the form of interest, dividends, and trading. In debt securities however interest income is all but assured. This is not the case when dealing with equity stocks and the dividend in these situations depends on the profits earned by the company among other factors. When investing in debt funds it may be that your best interest would not be a mutual fund. If you can afford the

## Blackstone and the Sale of Citigroup's Loan Portfolio

3649 Words | 15 PagesBLACKSTONE AND THE SALE OF CITIGROUP’S LOAN PORTFOLIO Market Conditions (I) • Corporate credit expansion in the U.S. between 2001 and the first half of 2007 was driven almost exclusively by the inflow of institutional (non-bank) funding into the syndicated loan market. • The participation of a wide range of institutional investors (including structured funds known as collateralized loans obligations (CLOs), hedge funds, mutual funds, pension funds, and insurance companies) in the corporate loan

## Human Capital, Asset Allocation, And Life Insurance

1828 Words | 8 Pagesthese traditionally distinct lines of thought together in one framework.” Up until now, this idea has never been explored or looked into. The goal of this idea was to see if one variable affected the other and what affect it had on the overall portfolio. The way this idea ties into the amount of life

## Risk and Return

10559 Words | 43 Pagesto risk. Your personality and lifestyle play a big role in how much risk you are comfortably able to take on. If you invest in stocks and have trouble sleeping at night, you are probably taking on too much risk. (For more insight, see A Guide to Portfolio Construction.) Risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Those of us who work hard for every penny we earn

## Otpp Case Study Essay

3128 Words | 13 PagesCase Study Ontario Teachers’ Pension Plan Patrick Jordan, John Schneider, David Mundorf, Alexandre Champavere, and Lezhi Huang Table of Contents Ontario Teachers’ Pension Plan............................... 2 Background .............................................................. 2 Risk Assessment ....................................................... 2 Portfolio Selection Analysis ...................................... 3 Optimal Asset Allocation......................................

### Risk Reduction by Diversification of Porfolio

1346 Words | 5 Pages### The Roles of Risk Free Rate

1020 Words | 4 Pages### Modern Portfolio Theory Adaptations ( Pmpt )

1267 Words | 6 Pages### Assessing Risks with International Diversification Essay

1674 Words | 7 Pages### Financial Market And Capital Market Essay

2444 Words | 10 Pages### Different Types Of Mutual Funds

1450 Words | 6 Pages### Blackstone and the Sale of Citigroup's Loan Portfolio

3649 Words | 15 Pages### Human Capital, Asset Allocation, And Life Insurance

1828 Words | 8 Pages### Risk and Return

10559 Words | 43 Pages### Otpp Case Study Essay

3128 Words | 13 Pages