FINC241 POI Fall 2017 HW6 Montgomery County Pension Fund.docx

1 quarterly report

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1 June 30, 2014 Quarterly Report, 1
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2. Calculate the correlation matrix of the allowable asset classes. Use whatever data sources you can find. Document your methods for determining the correlations. How have these correlations changed over time? How sensitive are your correlation estimates to the time period chosen if you are using historical data to estimate correlations? 3. Calculate the covariance matrix for the allowable asset classes. Remember that the covariance between two random variables is just the correlation of the two variables times their standard deviations: σ 1,2 = ρ 1,2 σ 1 σ 2 and that the covariance of a variable with itself is just its variance. 4. Estimate the expected rate of return and risk of the target asset allocation . Analyze for the midpoint of the allowable range for each asset class, as well as for the extremes. (Hint: Remember that the variance of the returns of a portfolio is σ 2 = wΣw T where w is 1xN the row vector of weights where N is the number of asset classes, Σ is the NxN covariance matrix for the riskiness of the returns of the asset classes, and w T is the Nx1 transpose of the weight vector. The function MMULT in Excel is extremely useful for matrix multiplication, but it is tricky to use so read the help for it carefully.
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  • Spring '14
  • TuranBali
  • asset classes, Montgomery County Pension, County Pension Fund

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