Merrill Finch Inc. Essay

2. (a) B and D are not minimum variance efficient portfolios. D is not efficient because

(a) The mean excess return, standard deviation, and portfolio weights for the minimum variance portfolio.

The coefficient of variation (CV) represents a percentage of standard deviation to the mean and can be calculated by dividing the standard deviation calculated using Equation 2 by the expected value. The equation can be calculated by:

increasing w by a small amount. Therefore, Marginal VAR (value at risk) allows risk managers to study the effects of adding or subtracting positions from an investment portfolio. Since value at risk is affected by the correlation of investment positions, it is not enough to consider an individual investment's VAR level in isolation. Rather, it must be compared with the total portfolio to determine what

5.Comparing two projects, Project B appears riskier because it has a larger standard deviation ($125,000) than Project A, but that does not consider relative risk. Actually, Project A is riskier because it has a larger coefficient of variation than Project B does.

(a) Estimate the expected return and standard deviation for a portfolio that allocates 50% to stock #1

2. What would have been Martin’s return for years 2000, 2001, and 2002 if his portfolio had remained with its initial holdings?

(See all the possible combinations on TABLE 2). 6. a) The portfolio’s risk would decrease if more stocks were.

b. Plot the CAL along with a couple of indifference curves for the investor type identified above. c. Use Excel’s solver to maximize the investor’s utility and confirm that you get a 50% allocation in stocks. 3. You can invest in a risky asset with an expected rate of return of 20% per year and a standard deviation of 40% per year or a risk free asset earning 4% per year or a combination of the two. The borrowing rate is 9% per year. a. What is the range of risk aversion for which a client will neither borrow nor lend, that is, for which the allocation to this risky investment is 100%? b. Draw the Capital Allocation Line. Indicate the points corresponding to (i) 50% in the risk-less asset and 50% in the risky asset; and (ii) -50% in the riskless asset and 150% in the risky asset. c. Compute the expected rate of return and standard deviation for (i) and (ii). d. Suppose you have a target risk level of 50% per year. How would you construct a portfolio of the risky and the riskless asset to attain this target level of risk? What is the

For problems requiring computations, please ensure that your Excel file includes the associated cell computations and/or statistics output; this information is needed in order to receive full credit on these

The process of portfolio construction can be quite complex. Analysts go through reams of statistics – past performance, future potential, and industry knowledge and rely on personal insights into the market to arrive at the final list (UOP, 2009). Every investor aims to maximize returns while minimizing risk. Individual securities must be evaluated not only on the risk-return trade-off in isolation but also on their contribution to the risk-return tradeoff of the entire portfolio. This memo will be based on the Constructing and Managing a Portfolio Simulation that details the fundamentals of portfolio construction in relation to the risk-return tradeoff and the relationship

Determine the expected return and variance for a portfolio composed of 25% of security A and 75% of security B.

During this time period, prices for the stocks increase substantially, accordingly reducing risk premium demanded by the traders. Also, shares should amount from 30 to 55 percent of the entire investment portfolio to optimize the investor’s expected profitability. Proximity of the evaluated results to the reality reveals excellence of the myopic loss aversion model (Siegel and Thaler, 1997).

Q2. Provide a full-page plot of the Capital Allocation Line for the case in Q1. Label the axes and locate cash, D. Equity, D. Bonds, and your optimal complete portfolio clearly on the plot. You may draw this plot by hand.

The systematic risk of a portfolio is the weighted sum of the systematic risk of each component. One can only obtain low systematic risk by choosing securities with low systematic risk for your portfolio. Unsystematic risk is the variation in the stock’s return that cannot be explained by the variation in the market index. For very large portfolios unsystematic risk can be almost eliminated. In this situation the risk each security contributes to the portfolio is approximately equal to its systematic risk or Beta. Therefore, the relevant risk for an individual security held within a well-diversified portfolio is its Beta. Portfolio is the relevant risk is the standard deviation. For example an investor invested all his money in a company’s stock. Then the relevant risk is the standard deviation because the portfolio consists of a single security. On the other hand, the investors holding of the company is a small fraction of a large diversified portfolio. Then the relevant risk is the Beta (Pierre, Gabriel and Albert, 1987).