There are two investment funds managed by the ABC investment company with the following characteristics: Fund Name Expected Return Standard Deviation Stock fund 20% 30% Bond fund 8% 10% The correlation of returns between the two funds is 0. The rate of 90-day Treasury bill is 2%. Suppose that you work in the ABC investment company as an investment advisor and provide one of its large private clients with advice on an investment decision. Specifically, this client has $1 million dollars for investments and is looking for the best investment combination of the stock fund, the bond fund, and the Treasury bill in terms of risk-return trade-off measured by Sharpe ratio.（need full process) Suppose that the client wants to have an expected return of 10% on the client’s complete investment portfolio that is the best investment combination of the stock fund, the bond fund, and the Treasury bill in terms of Sharpe ratio. For the total amount of money of $1 million dollars for investments, how much money do you recommend the client to invest in the stock fund, the bond fund, and the Treasury bill respectively? (Hint: You first need to determine the optimal risky portfolio with the stock fund and the bond fund, and then determine the best complete investment portfolio with an expected return of 10% for the client.)
There are two investment funds managed by the ABC investment company with the following characteristics:
|
Fund Name |
Expected Return |
Standard Deviation |
|
Stock fund |
20% |
30% |
|
Bond fund |
8% |
10% |
The correlation of returns between the two funds is 0. The rate of 90-day Treasury bill is 2%.
Suppose that you work in the ABC investment company as an investment advisor and provide one of its large private clients with advice on an investment decision. Specifically, this client has $1 million dollars for investments and is looking for the best investment combination of the stock fund, the bond fund, and the Treasury bill in terms of risk-return trade-off measured by Sharpe ratio.（need full process)
- Suppose that the client wants to have an expected return of 10% on the client’s complete investment portfolio that is the best investment combination of the stock fund, the bond fund, and the Treasury bill in terms of Sharpe ratio. For the total amount of money of $1 million dollars for investments, how much money do you recommend the client to invest in the stock fund, the bond fund, and the Treasury bill respectively? (Hint: You first need to determine the optimal risky portfolio with the stock fund and the bond fund, and then determine the best complete investment portfolio with an expected return of 10% for the client.)
Show the client all the best possible investment combinations of the stock fund, the bond fund, and the Treasury bill by drawing the graph of the best capital allocation line (CAL) with the largest Sharpe ratio based on the given information in this question. Use letters "C" and “P” to represent the one with an expected return of 10% for the client and the one for the optimal risky portfolio on the graph respectively. (Note: A hand drawn CAL is acceptable.)
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