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Consider two alternative diversified risky portfolios. The US-only portfolio is comprised exclusively of U.S. stocks (US portfolio), the Optimal Investment Portfolio (OIP Portfolio) is comprised of stocks from 20 different major countries.

Answer the following: A portfolio is constructed to have the same risk as the US portfollio, but is constructed using only a mix of the OIP and the risk free. How much higher annual return is the constructed portfolio expected to earn above the expected return on the US portfolio? Annual dollar-return data follows:

US Portfolio OIP Portfolio Risk Free
Expected Return 10% 12% 2%
Standard Deviation 20% 24% 0%

ANSWER: 0.33% , I need to know how to get this

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Casey Durgan
Casey DurganLv2
28 Sep 2019

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Related questions

Your uncle wants to create a portfolio based on two stocks, Google and Apple. Google has an expected return of 18% and a standard deviation of 20%. Apple has an expected return of 14% and a standard deviation of 14%. The correlation coefficient between the returns of Google and Apple is 0.4. The risk free rate is 10%.

a) Help your uncle construct the optimatl risky portfolio. What is the weight of Google in the optimal risky portfolio?
b) What is the expected return of the optimal risky portfolio?
c) Your uncle wants to take on more risk – he wants his portfolio to have a 20% standard deviation. He suggests holding only Google in his portfolio. Without calculations, briefly explain how your uncle can do better.

1. If we are able to eliminate all of the unsystematic or diversifiable risk in a portfolio then, what is the result?

a.

a risk-free portfolio
b.
a portfolio that has an expected return of zero
c.

a portfolio that contains only systematic risk

2. A portfolio consists 20% of a risk-free asset and 80% of a stock. The risk-free return is 4%. The stock has an expected return of 15% and a standard deviation of 30%. What’s the expected return of the portfolio?

a.
9.5%
b.
15.0%
c.
12.8%

d.
2%


3. The risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 1.5, what is its expected return?


a.
12%
b.
19.5%
c.

17%

4. For what value of the correlation coefficient for the returns of a pair of stocks will the benefits of diversification the largest?


a.

1.0
b.

-1.0
c.

0.0
d.

0.5


5. Which of the following is an example of systematic risk?
a.
IBM posts lower than expected earnings.
b.
The overall stock market becomes more risky due to super fasting trading algorithms.
c.

Intel announces record earnings.

6. According to the CAPM (capital asset pricing model), the security market line is a straight line. The intercept of this line should be equal to

a.
zero
b.
the expected risk premium on the market portfolio
c.
the expected return on the market portfolio
d.
the risk-free rate


7. A portfolio has 40% invested in Asset 1, 50% invested in Asset 2 and 10% invested in Asset 3. Asset 1 has a beta of 1.2, Asset 2 has a beta of 0.8 and Asset 3 has a beta of 1.8, what’s the beta of the portfolio?

a.
0.80
b.
1.06
c.
1.27


8. Suppose you can borrow and lend at the risk free-rate of 3%. Which of the following four risky portfolios has the best return relative to risk. (Hint: Calculate Sharpe Ratios the ratio of risk premium to standard deviation for each portfolio)

a.
portfolio with a standard deviation of 15% and an expected return of 12%
b.
portfolio with a standard deviation of 12% and an expected return of 9%
c.
portfolio with a standard deviation of 25% and an expected return of 18%
d.
portfolio with a standard deviation of 19% and an expected return of 15%


9. Which statements are TRUE regarding risk and return?

Statement I:
Diversification is the process of removing systematic risk from a portfolio.
Statement II:
In general, the greater the risk, the greater the return required by an investor.
Statement III:
Investors should focus on real returns if they are concerned about the purchasing power of their wealth.


a.
Statements II and III only
b.
Statement I only
c.
Statements I and III only
d.
Statements I and II only

10. The beta of the risk-free asset is:
a.

1.0
b.

0.5
c.

0.0
d.

-1.0

Question 5. (12 Points) You are saving money and have determined that you want to have a total return
on your account of 13%. While you are willing to take some risk, you would like to minimize the risks
that you are taking. Your savings can be invested into three different funds: a risk-free US Treasury Fund,
a U.S. Stock Fund, and an International Stock Fund. The information regarding the three funds is below.


Investment Expected Return Standard Deviation of Return

U.S. Treasury Fund 3.00% 0.00
U.S. Stock Fund 11.00% 0.37
International Stock Fund 16.00% 0.45


The correlation between the U.S. Stock Fund and the International Stock Fund is 0.6.
(a) If you invest only in the US Stock Fund and the International Fund to achieve a rate of return on
13%, what percentage of your portfolio would you have in US Stock Fund? What will your
standard deviation of your portfolio be? What will be the Sharpe ratio of your portfolio?

(b) If instead you are able to invest in the all three funds (the risk free US Treasury fund, US Stock
fund, and the International Stock fund), what is the highest Sharpe ratio you can achieve? (Hint:
Use solver in Excel and do not allocate any money to the U.S. Treasury Fund) How much money,
in percentage of the total portfolio, is allocated to the U.S. Stock Fund and to the International
Stock Fund in this optimal risky portfolio?

(c) Using your answer in part b, how much will you need to have invested in the risky assets (the
combination of U.S. Stock Fund and to the International Stock Fund you found in part b) and the
U.S. treasury fund to achieve your goal of a 13% rate of return with the lowest possible standard
deviation? What will be the standard deviation of your portfolio?

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