Plan will allow you to split your allocation between

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plan will allow you to split your allocation between the fund you choose from Exhibit 4.1 and the fixed rate option. For example, you can choose to have certain fraction (say 75%) in the fund that you choose and the remaining fraction (in this case 25%) in the fixed rate deposit. Exhibit 4.1: Historical Performance of Funds available to Jolly-Good Employees Fund Number Average Annual Returns (1990-2013) Standard Deviation (Annual) 1 11.78% 24.70% 2 12.34% 25.58% 3 9.03% 16.46% 4 9.61% 15.22% * Yes, it’s not ideal, but hey, you chose to work for the company. If you’ve got complaints, I would send them to the director of benefits for Jolly-Good. However, you should probably wait until you are done with this exam. Good job reading the footnotes. You are doing great, now get back to it.
9. Which fund(s) in Exhibit 4.1 (if any) will NEVER be selected by a rational investor (such as yourself)? (20 points)
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14 If you are not sure why this is the right way to think about the problem see below for more details. I DON’T UNDERSTAND WHY THAT WAS THE ANSWER – CAN YOU HELP EXPLAIN IT? The key to this question goes back to the Partner’s Healthcare case, which we spent a lot of time with. You should remember the graph from Exhibit 3 in the case which is shown below. We started the Partner’s discussion with the question “If you could invest in only one of these assets would you buy commodities?” The answer of course is no because it has higher risk than US equity (or foreign equity) AND has lower expected return. Hence, Commodities is dominated on its own.
15 If you were to create a graph of the funds in the question (which obviously I didn’t expect you to do by hand), you would get the following

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