Please provide a detailed step-to-step explanation on how you came about answeri

Question

Please provide a detailed step-to-step explanation on how you came about answering each part of the question please and thank you!

Problem 5-09 The table below shows data on the returns over five 1-year periods for seven mutual funds. A firm's portfolio managers will assume that one of these scenarios will accurately reflect the investing climate over the next 12 months. The probabilities of each of the scenarios occurring are 0.1, 0.3, 0.1, 0.1, and 0.4 for years 1 to 5, respectively RETURNS OVER FIVE 1-YEAR PERIODS FOR SEVEN MUTUAL FUNDS Mutual Funds Large-Cap Stock Mid-Cap Stock Small-Cap Stock Energy/Resources Sector Health sector Technology Sector Real Estate Sector Planning Scenarios for Next 12 Months Year 1 Year 2 Year 3 Year 4 Year5 28.3 0.9 6.0 20.5 29.7 45.7 21.1 35.3 32.3 20.8 25.3 49.1 46.2 20.5 20.0 23.2 22.5 33.9 5.5 21.7 44.0 10.4 49.3 33.3 20.9 77.7 93.1 2.6 -9.3 22.8 6.1 -2.5 -24.9 -20.1 5.1

Explanation / Answer

A)

First is to arrive at the expected return over the next 12 months given the past 5 year data and the probabilitiies assigned to each.

B) The relatively higher tolerance of the investor justifies a larger allocation to riskier categories of MS, SS , ES and RS.

10% (LS) + 20% (MS) + 20% (SS) + 15% (ES) + 10% (HS) + 10% (TS) + 15% (RS) = 20.685%

C) Given the lower risk tolerance, the portfolio should consist of the lower risk categories such as LS and defensive sectors like HS and TS.

50% (LS) + 25% (HS) + 25% (TS) = 10.9175%

D) The portfolio return in b is higher when compared to c, as is consistent with the difference in the level of risk tolerance.

Y1 Y2 Y3 Y4 Y5 E(R) LS (35.3 X 0.1) + (20.0 X 0.3) + (28.3 X 0.1) + (10.4 X 0.1) + (-9.3 X 0.4) = 9.68 MS (32.3 X 0.1) + (23.2 X 0.3) + (-0.9 X 0.1) + (49.3 X 0.1) + (-22.8 X 0.4) = 5.91 SS (20.8 X 0.1) + (22.5 X 0.3) + (6.0 X 0.1) + (33.3 X 0.1) + (6.1 X 0.4) = 15.2 ES (25.3 X 0.1) + (33.9 X 0.3) + (-20.5 X 0.1) + (20.9 X 0.1) + (-2.5 X 0.4) = 11.74 HS (49.1 X 0.1) + (5.5 X 0.3) + (29.7 X 0.1) + (77.7 X 0.1) + (-24.9 X 0.4) = 7.34 TS (46.2 X 0.1) + (21.7 X 0.3) + (45.7 X 0.1) + (93.1 X 0.1) + (-20.1 X 0.4) = 16.97 RS (20.5 X 0.1) + (44.0 X 0.3) + (-21.1 X 0.1) + (2.6 X 0.1) + (5.1 X 0.4) = 7.2

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.