As part of your new role in the firm you are also proposing an expansion of the

As part of your new role in the firm you are also

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As part of your new role in the firm you are also proposing an expansion of the investment opportunity set by recommending the inclusion of two additional ETFs that invest in real estate investment trusts (REITs) and commodities. The research team in your firm came up with the following assumptions for these two asset classes. Asset Class Expected Returns Standard Deviation REIT 9.3 % 14 % Commodities 10.2 % 28 % Correlation with Domestic Equity Foreign Equity Long-Term Bonds REITS Commodities Domestic Equity 1 Foreign Equity 0.77 Long-Term Bonds 0.38 0.13 REITS 0.71 0.26 0.45 Commodities -0.11 0.03 -0.13 -0.14 3. (8 points) Would the addition of REITs and commodities help your client that wants to invest in a portfolio with an expected return of 9%? Answer this question based on your answer to Question 2. What would be the specific recommendation about the amount your client should invest to have an expected return of 9% now that you are allowing for these two additional asset classes? Recall that he has $200 million dollars to invest. Also plot the efficient frontier of your five risky asset portfolio and the tangency portfolio and compare it to the one in Question 1. 4. (5 points) You would like to offer only one portfolio of riskyassets to all clients. You will then, based on the tolerance for risk of each of your clients, allow for different proportions of their investments in the risky asset portfolio and the Money Market Mutual Fund. Your boss thinks that this approach is too restrictive as it might result in suboptimal portfolios for some clients. Is your boss right? If he is not right, what would you say to your boss to change his/her mind? 1 1 1 1
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  • Fall '14
  • FranciscoBarillas

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