Money and Banking Essay

1855 WordsMar 30, 20158 Pages
연세대학교 화폐금융론 (2013년 1학기) 박기영 교수 Problem Set 3 Suggested Answer 참고교재: 강의노트, YSCEC에 올린 readings. 1. Read the handout on TIPS. 경제학부 2. (from BKM) George Stephenson’s current portfolio of $2 million is invested as follows: Summary of Stephen’s Current Portfolio Value Percent Expected Annual Return Short-term bonds $200,000 10% 4.6% Domestic large-cap equities 600,000 30% 12.4% Domestic small-cap equities 1,200,000 60% 16.0% Total portfolio $2,000,000 100% 13.8% Annual Std. 1.6% 19.5% 29.9% 23.1% Stephen soon expects to receive an additional $2 million and plans to invest the entire amount in an index fund that best complements the current portfolio. Stephanie Coppa, CFA, is evaluating the four index funds show in the following table for their ability to produce a portfolio that will meet two criteria relative to the current portfolio: (1) maintain or enhance expected return and (2) maintain or reduce volatility. Each fund is invested in an asset class that is not substantially represented in the current portfolio. Index Fund Characteristics Index Fund Expected Annual Return Expected Annual Std. Fund A 15% 25% Fund B 11 22 Fund C 16 25 Fund D 14 22 Correlation w/ Current Portfo +0.80 +0.60 +0.90 +0.65 State which fund Coppa should recommend to Stephenson. Justify your choice by describing how your chosen fund best meets both of Stephenson’s criteria. No calculations are required. Answer: Fund D represents the single best addition to complement Stephenson’s current portfolio, given his selection criteria. First, Fund D’s expected return (14.0 percent) has the potential to increase the portfolio’s return somewhat. Second, Fund D’s relatively low correlation with his current portfolio (+0.65) indicates that Fund D will provide greater diversiﬁcation beneﬁts than any of the other alternatives except Fund B. The result of adding Fund D should be a

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