HW3_sol - Purdue University Krannert School of Management...

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Purdue University Krannert School of Management MGMT 411: INVESTMENTS Assignment #3 Solution 1. Suppose that your job is to hire two portfolio managers and let each one of them run his investment strategy independently. Unfortunately, you know little about these managers, and have no better guess than to assume that the monthly returns that each one’s portfolio will generate are distributed with a mean of 1% and a standard deviation of 9% (i.e., the assets under management have identical distributions). After hearing descriptions of their strategies, you believe that it is reasonable to assume that the returns on their portfolios will be uncorrelated. Your colleague says that since all managers are basically equivalent there is no point to hiring more than one. Prove that a portfolio that is 50% invested in one manager ("manager 1") and 50% invested in another manager ("manager 2") would be strictly preferred by a risk-averse investor over an investment in either one individually. The mean return of the portfolio P is the value-weighted average of the means of the
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HW3_sol - Purdue University Krannert School of Management...

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