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# Q4 - Q4(a By ignoring the volatility correlation and only...

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Q4 (a) By ignoring the volatility, correlation and only focus on the achieving an expected re- turns of 9% to 11%, we recommend Mr. David Tan to have a “Balance” portfolio. The portfolio comprises of investing in different assets class with equal weighted alloca- tion. By allocating of the weighted assets equally, it will achieve a well balanced portfolio. The portfolio include of:- 25% of (1) Domestic Equity 25% of (2) International Equity 25% of (5) Alternative Investment 25% of (6) Real Estate The overall portfolio will achieve the expected return of 10.5% and the asset-class weights sum-up to 100%, as shown in Table 4.1 . Assets Expected Return Weight Selectio n Selected Portfoli o Weight (%) Selected Portfolio Weighted Return (1) Domestic Equity 8% 25% 1 25% 2.00% (2) International Equity 12% 25% 1 25% 3.00% (3) Domestic Fixed Income 6% 25% 0 0% 0.00% (4) International Fixed Income 5% 25% 0 0% 0.00% (5) Alternative Investment 15% 25% 1 25% 3.75% (6) Real Estate 7% 25% 1 25% 1.75% Total 4 100% 10.50% Formula:- Portfolio Expected Return = W 1 *E(R 1 ) + W 2 *E(R 2 ) +… W n *E(R n ) **Selected (Yes) = 1 , Not Selected (No) = 0 Table 4. 1

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Q4 (b) The portfolio needs to take in the constraints of volatility and correlation so as to re- calibrate the portfolio and bring down the overall portfolio risk. Correlation Among Asset Class Assets Expecte d Return Volatility 1 2 3 4 5 6 (1) Domestic Equity 8% 15.80% 1 (2) International Equity 12% 21.70% .54 1 (3) Domestic Fixed Income 6% 2.25% -.11 -.67 1 (4) International Fixed Income 5% 5.60% -.18 .17 .41 1 (5) Alternative Investment 15% 38.30% -.21 .11 -.29 -.44 1
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