What is the expected return on the mutual fund

Assignment Help Financial Management
Reference no: EM13722902

Consider the following capital market: a risk-free asset yielding 0.75% per year and a mutual fund consisting of 70% stocks and 30% bonds. The expected return on stocks is 10.75% per year and the expected return on bonds is 3.25% per year. The standard deviation of stock returns is 30.00% and the standard deviation of bond returns 8.75%. The stock, bond and risk-free returns are all uncorrelated.

1. What is the expected return on the mutual fund?

2. What is the standard deviation of returns for the mutual fund?

Now, assume the correlation between stock and bond returns is 0.45 and the correlations between stock and risk-free returns and between the bond and risk-free returns are 0 (by construction, correlations with the risk-free asset are always zero).

3. What is the standard deviation of returns for the mutual fund? Is it higher or lower than the standard deviation found in part 2? Why?

Now, assume that the standard deviation of the mutual fund portfolio is exactly 20.25% per year and a potential customer has a risk-aversion coefficient of 2.25.

4. What correlation between the stock and bond returns is consistent with this portfolio standard deviation?

5. What is the optimal allocation to the risky mutual fund (the fund with exactly 20.25% standard deviation) for this investor?

Reference no: EM13722902

Questions Cloud

Bona fide occupational qualification : Employers may discriminate because of religion, gender, and national origin if they can establish that there is a bona fide occupational qualification. This condition does not apply to race and color...do you think it should? What is your reasonin..
What are the annual deposits in years : Suppose that the parents of a young child decide to make annual deposits into a savings account with the first deposit on the 5th birthday and the last on the 15th birthday.
What was margie''s gain before taxes : Margie Browning purchased 500 shares of Krispy Kreme Doughnut Corporation at $21 and sold the 500 at $103. What was Margie's gain before taxes
Employment opportunity by actively selecting minorities : Affirmative action attempts to achieve equal employment opportunity by actively selecting minorities and women where they have been underrepresented in the workforce. Do you think it is still needed? What is your reasoning?
What is the expected return on the mutual fund : Consider the following capital market: a risk-free asset yielding 0.75% per year and a mutual fund consisting of 70% stocks and 30% bonds. The expected return on stocks is 10.75% per year and the expected return on bonds is 3.25% per year. The standa..
What impact did nomadic migractions of the germanic franks : What impact did nomadic migractions of the Germanic Franks and Central Asians have on world history
Philosophical viewpoints on social welfare policies : In this assignment, you will examine the ideological struggles that underlie policymaking in the United States. This includes the following:
What is the compound future value : Amy Parker a 22 year old Naval Architect is quick to admit that she does not plan to keep close tabs on her 401k. Amys contribution plus that of her employer, amounts to $2200 per year starting at the age of 23. Amy expects this amount will increase ..
Why is power normally sent in bulk : Why is power normally sent in bulk

Reviews

Write a Review

Financial Management Questions & Answers

  Foreign company acquisition

Acquisition by a foreign company and the effects of that decision and the results of foreign exchange in Euro and the exchange rate differences.

  Financial management for profit and non profit organizations

In this essay, we are going to discuss the issues of financial management in a non-profit organisation.

  Method for estimating a venture''s value

Evaluate venture's present value, cash and surplus cash and basic venture capital.

  Replacement analysis

This document show the Replacement Analysis of modling machine. Is replacement give profit to company or not?

  Business finance task - capital budgeting

Your company is considering using the payback period for capital-budgeting. Discuss the advantages and disadvantages of this technique.

  Analysis of the investment

In this project, you will focus on one of these: the additional cost resulting from the purchase of an apple press (a piece of equipment required to manufacture apple juice).

  Conduct a what-if analysis

Review the readings and media for this unit, including the Anthony's Orchard case study media. Familiarise yourself with the Anthony's Orchard company and its current situation.

  Determine operational expenditures

Organisations' behaviour is guided by financial data. In the short term, such data will help determine operational expenditures; in the long term, historical data may help generate forecasts aimed at determining strategic plans. In both instances.

  Personal financial management

How much will you have left over each half year if you adopt the latter course of action?

  Sources of finance for expansion into new foreign markets

A quoted company is considering several long-term sources of finance for expansion into new foreign markets.

  Long term financial planning

This assignment is designed for analyze Long term financial planning begins with the sales forecast and the key input in the long term fincial planning.

  Explain the role of fincial manager

This assignment explain the role of fincial manager, function of manger. And what are the motives of financial manager.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd