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Project 1 Write up

# Project 1 Write up - Dr Trance Portfolio Man Dr Frank Jones...

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Dr. Trance 11/2/2009 Portfolio Man. Dr. Frank Jones Project 1 – Optimization 1) EF and CML a) CML = rf +((rm-rf)/σm)*σp b) The PM: Where: Asset 1 = Ibbotson Associates Small Stock Asset 3 = Ibbotson Associates All Value Asset 4 = Ibbotson Associates Monthly Convertible Asset 5 = Lehman Brothers Aggregate Bond Asset 6 = Lehman Brothers Hi-Yield c) There are negative numbers. These numbers represent the need to short this security as it is overpriced and we can get more return by investing more in another security. Thus we are investing over 100% as we borrow. 2) a) Personally optimal point = The PM is my personally optimal point. b) I selected this point because I am risk averse. c) The composition of my personally optimal portfolio is the same as the Market Portfolio. d) By choosing the PM as my preferred portfolio I do not have to do any borrowing or lending of the Risk Free Asset. 3) Sharpe Ratio a) ((rm-rf)/σm) = ((11.01-5.02)/6.63) = .90346908 b) Personal Portfolio is the same Sharpe Ratio 4) +- 5% a) The compositions are the same we just have to borrow and lend the risk free rate b) Sharpe ratios i) +5% ((rp-rf)/σp)= .90283749 ii) -5% ((rp-rf)/σp) = .90184049 c) Yes these ratios do make me want to invest in a higher risk portfolio.

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5) a) To measure superiority we shall use the Sharpe ratio i) 6 asset Sharpe Ratio = .90346908 ii) 3 asset Sharpe Ratio = ((14.76-5.02)/16.26) = .59901599 b)
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Project 1 Write up - Dr Trance Portfolio Man Dr Frank Jones...

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