Table 1 shows data on the returns over five 1-year periods for six mutual funds.
ID: 453007 • Letter: T
Question
Table 1 shows data on the returns over five 1-year periods for six mutual funds. A firm’s portfolio manager 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
a.Develop a portfolio model for investors who are willing to risk a portfolio with a return no lower than 2%.
b.Solve the model in part (a) and recommend a portfolio allocation for the investor with this risk tolerance.
Mutual Fund Year 1 Year 2 Year 3 Year 4 Year 5 LCS 35.3 20 28.3 10.4 -9.3 MCS 32.3 23.2 -0.9 49.3 -22.8 SCS 20.8 22.5 6 33.3 6.1 E/R S 25.3 33.9 -20.5 20.9 -2.5 HS 49.1 5.5 29.7 77.7 -24.9 TS 46.2 21.7 45.7 93.1 -20.1 RES 20.5 44 -21.1 2.6 5.1Explanation / Answer
Solving in Excel:
the portfolio allocation as per this model:
the total amount to be invested in TS mutual fund.
Decision Variables: Year 1 Year 2 Year 3 Year 4 Year 5 A proportion of portfolio invested in LCS 35.3 20 28.3 10.4 -9.3 B proportion of portfolio invested in MCS 32.3 23.2 -0.9 49.3 -22.8 C proportion of portfolio invested in SCS 20.8 22.5 6 33.3 6.1 D proportion of portfolio invested in E/RS 25.3 33.9 -20.5 20.9 -2.5 E proportion of portfolio invested in HS 49.1 5.5 29.7 77.7 -24.9 F proportion of portfolio invested in TS 46.2 21.7 45.7 93.1 -20.1 G proportion of portfolio invested in RES 20.5 44 -21.1 2.6 5.1 Probabilities 0.1 0.3 0.1 0.1 0.4Related Questions
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