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The Knowles/Armitage (KA) group at Merrill Lynch advises clients on how to create a diversified investment portfolio. One of the investment alternatives they make available to clients is the All World Fund composed of global stocks with good dividend yields. One of their clients is interested in a portfolio consisting of investment in the All World Fund and a treasury bond fund. The expected percent return of an investment in the All World Fund is 7.80% with a standard deviation of 18.90%. The expected percent return of an investment in a treasury bond fund is 5.50% and the standard deviation is 4.60%. The covariance of an investment in the All World Fund with an investment in a treasury bond fund is −12.4. a. Which of the funds would be considered the more risky? Why? b. If KA recommends that the client invest 75% in the All World Fund and 25% in the treasury bond fund, what is the expected percent return and standard deviation for such a portfolio? What would be the expected return and standard deviation, in dollars, for a client investing $10,000 in such a portfolio? c. If KA recommends that the client invest 25% in the All World Fund and 75% in the treasury bond fund, what is the expected return and standard deviation for such a portfolio? What would be the expected return and standard deviation, in dollars, for a client investing $10,000 in such a portfolio? Which of the portfolios in parts (b) and (c) would you recommend for an aggressive investor? Which would you recommend for a conservative investor? Why?

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STATISTICS F/BUSINESS+ECONOMICS-TE...

13th Edition
Anderson
Publisher: CENGAGE L
ISBN: 9781305881884
BuyFind

STATISTICS F/BUSINESS+ECONOMICS-TE...

13th Edition
Anderson
Publisher: CENGAGE L
ISBN: 9781305881884

Solutions

Chapter
Section
Chapter 5, Problem 63SE
Textbook Problem
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The Knowles/Armitage (KA) group at Merrill Lynch advises clients on how to create a diversified investment portfolio. One of the investment alternatives they make available to clients is the All World Fund composed of global stocks with good dividend yields. One of their clients is interested in a portfolio consisting of investment in the All World Fund and a treasury bond fund. The expected percent return of an investment in the All World Fund is 7.80% with a standard deviation of 18.90%. The expected percent return of an investment in a treasury bond fund is 5.50% and the standard deviation is 4.60%. The covariance of an investment in the All World Fund with an investment in a treasury bond fund is −12.4.

  1. a. Which of the funds would be considered the more risky? Why?
  2. b. If KA recommends that the client invest 75% in the All World Fund and 25% in the treasury bond fund, what is the expected percent return and standard deviation for such a portfolio? What would be the expected return and standard deviation, in dollars, for a client investing $10,000 in such a portfolio?
  3. c. If KA recommends that the client invest 25% in the All World Fund and 75% in the treasury bond fund, what is the expected return and standard deviation for such a portfolio? What would be the expected return and standard deviation, in dollars, for a client investing $10,000 in such a portfolio?

Which of the portfolios in parts (b) and (c) would you recommend for an aggressive investor? Which would you recommend for a conservative investor? Why?

Expert Solution

a.

To determine

Identify the fund which is considered to be more risky.

Explanation of Solution

The client is interested in a portfolio consisting of investment in the All World Fund and a Treasury bond fund. The expected percent return of an investment in the All World Fund is 7.80% with the standard deviation of 18.90%. The expected percent return in Treasury bond fund is 5.50% and standard deviation is 4.60%...

Expert Solution

b.

To determine

Find the expected percent return and the standard deviation for a portfolio in which the client has to invest 75% in the All World Fund and 25% in the Treasury bond fund.

Expert Solution

c.

To determine

Find the expected percent return and standard deviation for a portfolio in which the client has to invest 25% in the All World Fund and 75% in the Treasury bond fund.

Find the expected return and standard deviation, in dollars, for a client investing $10,000 in a portfolio in which the client has to invest 25% in the All World Fund and 75% in the Treasury bond fund.

Expert Solution

d.

To determine

Explain which portfolio in parts (a) and (b) one will recommend for an aggressive investor and which one for a conservative investor.

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Chapter 5 Solutions

STATISTICS F/BUSINESS+ECONOMICS-TEXT
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