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##### I am looking for help with an Investments assignment

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I have 2 problems and I need to do the work in excel. Everything must be properly labeled. Document Preview: Question #1: Capital Allocation: Consider the following capital market: a risk-free asset yielding 1.25% per year and a mutual fund consisting of 75% stocks and 25% bonds. The expected return on stocks is 10.25% per year and the expected return on bonds is 2.95% per year. The standard deviation of stock returns is 27.00% and the standard deviation of bond returns 9.50%. The stock, bond and risk-free returns are all uncorrelated. 1. What is the expected return on 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 0.55 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? Now, assume that the standard deviation of the mutual fund portfolio is exactly 22.50% per year and a potential customer has a risk-aversion coefficient of 2.45. 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 22.50% standard deviation) for this investor? 6. What is the expected return on the complete portfolio? 7. What is the standard deviation of the complete portfolio? 8. What is the Sharpe ratio of the complete portfolio? Question #2: Markowitz Optimization: Open the associated Excel file named QPS2-2 input.xlsx in My Course Content::Problem Set Spreadsheets. Version A: Use Excel column K observation numbers 64 through 123 (2002m01 – 2006m12) to answer the following questions: 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. Consider the simple case where short sales are allowed. Use... Attachments: FIN5620-PROBL....xlsx QPS2-2-input.....xlsx Aug 15 2014 09:42 PM

Solution ID:609071 | This paper was updated on 26-Nov-2015

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