Potofolio Choice

Potofolio Choice Assignment 1 Question 1 [20 marks] You are a fund manager who is considering three mutual funds: a fund of equities E; a fund of long term corporate debt D; and a fund of safe short-term government debt F which yields a rate of return of 5%. The probability distributions for the two risky funds are given in the table Expected Return E[r] Standard Deviation, s Equity Fund (E) 14% 26% Debt Fund (D) 9% 14% The correlation between the risky funds is ?E,D = 0.2. Your investment analyst has determined that the optimal risky portfolio of the two risky funds has the expected rate of return of 11.1% and standard deviation of 14.8%. a) Determine the minimum-variance portfolio of the two risky funds as given by the weights wD and wE of your investment into funds D and E respectively. Determine the expected rate of return and the standard deviation of the minimum-variance portfolio. Show all relevant calculations. [7 Marks] b) Present graphically in the E[r]-s plane the portfolio opportunity set as given by the two risky funds E and D. Indicate all relevant reference points. Without doing any calculations, demonstrate graphically in the same E[r]-s plane how the portfolio opportunity set would change (relative to its current 2 position) if the correlation between the risky funds D and E takes value: ?E,D = - 0.2. Provide an explanation in no more than 150 words.1 [8 marks] c) Your client Jin Li wishes to obtain 17% return on her investment portfolio. How would you advise your client to allocate her capital among the available portfolios E, D and F? What will be the standard deviation of your client’s portfolio? Present all relevant calculations. [5 marks] Question 2 [10 marks] Your clients Peter and Jane have coefficients of risk aversion: A=1.5 (Peter) and A=3.0 (Jane). (a) Indicate briefly how would you characterise each of these investors’ attitude to risk: (i) risk-loving, (ii) risk-neutral or (iii) risk-averse? [2 Marks] (b) Without any calculations, indicate which of the indifference curves depicted below: C1 or C2 is likely to belong to Jane? Explain your answer carefully in no more than 200 words. [8 Marks] The end 1 Please note that your answer will not be read beyond the word limit. E[r] s C1 C2 The assessment task is due on the date specified byyour assessor. Any variations to this arrangement must be approved in writing by your assessor. Submit this document with any required evidence attached. See specifications below for details. Performance objective “- Candidates will demonstrate knowledge and skills required to administer and monitor projects. Assessment description Using the workplace scenario information provided. you wil work collaboratively with your project team to administer and monitor a projeu (initiated. planned and dismissed in Assessment Task 1) in order to achieve the project deiiverabies. Procedure -_________-____ 1, Review the simulated bushes: documentation. insuring policies and procedures inthedocument 'Mthionei intiie document possible use or adaptation in