ignment Garamond 20% Conditional el Formatting. Merge n A peer of yours (who has
ID: 2744672 • Letter: I
Question
ignment Garamond 20% Conditional el Formatting. Merge n A peer of yours (who has not yet taken this class) asks you for investment advice, They want to accumulate wealth for retiremen, are risk averse, and do not really comprehend the concept of the efficient set. Your peer would like to put all of thier assets into a single loy riek money market fund. Show them how moving a potion of their investment into a riskier asset will actually DECREASE their risk while INCREASING their returns. They want to invest everything in the Vanguard Inflation-Prorected Securities Fund: Invesror (VIPS) Fund which, over the last three-year period, had a standard deviation of 4.2 and a return of 1.16%. You are suggesting that they put a portion of their portfolio into a riskier investment, perhaps the Fidelity Real Estate Investment Portfolio (FRES), which, over the last three-year period, had a standard deviation of 14.18 "nd a teturn of 15.33%, Assume that the future performance of these funds will match the prioftrree-yeat peciod, and that the correlation berween the funds is 0.150. What is the expected annual return and standard devíation of investing everything in VIPSX? Can you calculate s portfolio weighting at which the expected return will be higher than a 100% investment in VIPsxr what are the weightings, the expected annual return, and the standard deviation of that portfolio? How will you explain what this means to your peer? We know that ViPSX Seas Shandard Deviation 4.200 Expectedreturn of VIPSX Standard Deviation of of VPS Enter your answer aus a percentage c , 11.11% Portfolio Weighting of FRESX Enter your answer as a percentage e.g., 11.11% Enter your answer as a percentage e.g., 11.11% Portfoljo Weighting of VIPSX H 11 START HERE&T; YOUR TEST atl START H Ready Normal View Sum-0Explanation / Answer
Return from VIPSX 1.16 SD of VIPSX 4.2 Return from FRESX 15.33 SD of FRESX 14.18 Corelation coefficient 0.15 Let 90% be invested in VIPSX and 10% in FRESX Portfolio Return=0.9*1.16+0.10*15.33 2.58 V(Portfolio)=V(X) * (Weight X ^2 ) + V(Y) * (Weight Y ^2) + 2*Weight X*Weight Y*SD(X)*SD(Y)*Correlation Coefficient V(Portfolio)=(4.2^2)*(0.9^2)+(14.18^2)*(0.10^2)+2*0.9*0.1*4.2*14.18*0.15 17.91 SD=(V)^(1/2)=(17.91)^(1/2) 4.23 So with a very small investment of 10% in FRESX the return will be 2.58% and SD will be 4.23.
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