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- Bhavika Investments, a group of financial advi-sors and retirement planners, has been requested to provide advice on how to invest $200,000 forone of its clients. The client has stipulated thatthe money must be put into either a stock fund ora money market fund and the annual return shouldbe at least $14,000. Other conditions related to riskhave also been specified, and the following linear program was developed to help with this invest-ment decision: Minimize risk = 12S + 5Msubject toS + M = 200,000 total investment is$200,000 0.10S + 0.05M Ú 14,000 return must be at least $14,000 M Ú 40,000 at least 40,000 must bein money market fund S, M Ú 0whereS = dollars invested in stock fundM = dollars invested in money market fundThe QM for Windows output is shown below.(a) How much money should be invested in themoney market fund and the stock fund? What isthe total risk?(b) What is the total return? What rate of return isthis?(c) Would the solution change if the risk measurefor each dollar…Use the following to answer questions a. – f. a. What is the alpha for Fund B? b. Based on alpha, which fund displays superior performance? c. What is the Sharpe ratio for Fund B? d. Based on the Sharpe ratio, which fund displays superior performance? e. Suppose you are an investment counselor with a new client, Jonsey, and that Funds A and B are the only options available in Jonsey's company sponsored retirement account. Jonsey has no other investments. Which fund would you recommend, and why? f. What additional evidence would make you more confident in your recommendation, that is, more confident that the fund you recommend has the ability to perform in the future? (Hint: The answer has nothing to do with the Treynor Index.)James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's investment objective is to acquire home mortgage securities at what is hopes will be bargain prices. The fund sponsor has suggested to James that the fund's performance will hing on how the national economy performs in the coming year. Specifically, he suggested the following outcomes: State of the Economy Probability Fund Return Rapid expansion and recovery 5% 100% Modest growth 45% 35% Continued Recession 45% 5% Falls into depression 5% -100% a. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity? b. Would you be invested in such an investment? note that your money in one year if the economy callapses into the worst state or you double your money iif the economy enters into a rapid expansion. (Hint calculate the Standard deviation and comment on the risk-return tradeoff)
- The Jeffersons want to start investing $600 monthly to achieve their stated short- and long-term objectives. Which of the following monthly investments is most appropriate for them at this time and why? Provide two pros for the investment allocation you selected and one con for each of the investment allocations you did not select. $600 in a Roth IRA account for Jaylen, allocated as $300 in large cap domestic growth stocks, and $300 in an international growth fund $600 in a AAA-rated municipal bond fund $600 in a high yield, long-term bond fund $100 in a money market account, and $500 in a Roth IRA global balanced mutual fundThe endowment fund for The University of Southern California state in their 2019 endowment report specify the endowment investment objective as: "Recognizing that market volatility and economic change create both risks and opportunities, the university employs a long-term and active investing philosophy that responds to changing environments and takes advantage of valuation extremes. This approach is designed to enable the endowment to grow in real terms, providing meaningful annual returns that keep pace with inflation, while minimizing risk and volatility." Regarding their spending policy, USC states "The payout is set annually by the Finance Committee of the Board of Trustees, and is generally between 4% and 6% of the average market value of the Endowment Fund for the previous 12 calendar quarters." If USC does not forecast any further donations, inflation is forecasted to be 1% per annum and the desired real fund growth of 1.5%: (i) calculate the expected real required return? (ii)…Managed funds are often categorised by the type of investments purchased by the fund. These include capital stable funds, balanced growth funds and managed capital growth funds. For each of these funds, discuss the types of investments the fund might accumulate and explain the purpose of the investment strategies. If Jaleel is identified as a risk averse investor, which type of fund would you recommend Jaleel to consider investing?
- (Computing the standard deviation for an individual investment) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund's performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possible outcomes: LOADING... . a. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity? b. Calculate the standard deviation in the anticipated returns found in part a. c. Would you be interested in making such an investment? Note that you lose all your money in one year if the economy collapses into the worst state or you double your money if the economy enters into a rapid expansion. State of Economy Probability Fund Returns Rapid expansion and recovery…explain how a firm that expect funds during the coming year might make sure the needed funds will be avaiilableThe following data is reported for a fund and an appropriate benchmark as well as the risk-free rate each year: Fund Return Benchmark Return Risk-free rate Year 1 15% 12% 2% Year 2 15% 12% 2% Year 3 16% 13% 2% Year 4 19% 14% 2% Year 5 20% 14% 2% Year 6 22% 15% 2% Year 7 26% 24% 2% Year 8 24% 22% 2% Year 9 21% 19% 2% Year 10 19% 18% 2% Required: a. What is the Sharpe ratio for the fund and the benchmark? Asnwer is not Fund: 4.77 and Benchmark: 3.37 b. What is the Treynor ratio for the fund and the benchmark? Answer is: Fund: 22.79 Benchmark: 14.30 c. What is the fund tracking error? Asnwer is Not 1.71
- When you were at lunch, you overheard a heated conversation between two employees ofBig Rock. One was arguing a case for active fund management strategies and the otherwas arguing a case for passive fund management strategies. They decide to get youropinion on the two strategies to settle the argument. Required: Discuss the key characteristics of active fund management and passive fundmanagement, focusing on how the objectives of active management differ from those ofpassively managed funds.Joan McKay is a portfolio manager for a bank trust department. McKay meets with two clients, Kevin Murray and Lisa York, to review their investment objectives. Each client expresses an interest in changing his or her individual investment objectives. Both clients currently hold well-diversified portfolios of risky assets.a. Murray wants to increase the expected return of his portfolio. State what action McKay should take to achieve Murray’s objective. Justify your response in the context of the CML.b. York wants to reduce the risk exposure of her portfolio but does not want to engage in borrowing or lending activities to do so. State what action McKay should take to achieve York’s objective. Justify your response in the context of the SML.In each of the three scenarios below (a, b, and c), choose ONE appropriate measure of performance among the following four measures: i) Sharpe Measure ii) Treynor Measure iii) Jensen’s Alpha iv) Information Ratio a) A charitable foundation is considering investing its entire endowment with a single portfolio manager. b) A diabetes foundation is considering choosing many portfolio managers (from a very large pool of portfolio managers) to manage its endowment. c) A university endowment is considering adding a position in an actively-managed portfolio to an already existing passive portfolio. It is evaluating several actively-managed portfolios to choose one among them. PLEASE PROVIDE YOUR ANSWERS IN THE FREE-RESPONSE BOX BELOW:
