Ayasha, age 30, is beginning to contemplate her financial future. Right now, she lives in a...

70.2K

Verified Solution

Question

Finance

Ayasha, age 30, is beginning to contemplate her financialfuture. Right now, she lives in a large city where she rents aone-bedroom apartment. Although she loves the excitement of thecity, she knows that someday she would like to move to the countryand live in a farmhouse. Her goal is to begin saving for thisobjective right away. Ayasha has identified three possibleportfolios that might be appropriate choices as she beginsinvesting to reach her objective. Each portfolio consists of thefollowing stocks, bonds, and cash assets.
Portfolio 1
Portfolio 2
Portfolio 3
10% cash
10% cash
15% cash
20% bonds
40% bonds
50% bonds
70% stocks
50% stocks
35% stocks
Instructions:
Calculate the weighted average rate of return for eachportfolio, assuming that the average return of each asset is asfollows. (Hint: Multiply the allocation percentage by the rate ofreturn to determine the “weighted average” for the asset: stocks9%, bonds 4%, and cash assets 2%.)

Which portfolio has the greatest level of uncertaintyassociated with the returns? How can you tell?
If Ayasha?s risk tolerance is below average and she has along-time horizon (15 years), which of the three portfolios wouldbe most appropriate for her?
If Ayasha?s time horizon for goal achievement is 4 years, whichportfolio would be most appropriate?
What type of risk does Ayasha face if she invests in portfolio3?

Answer & Explanation Solved by verified expert

3.6 Ratings (435 Votes)

AWeighted average return on portfolio refers tothe return on the assets in the portfolio on the basis of assetscomprised in the portfolio In other words it is computed bymultiplying the return from the assets with the weightage ofinvestment in such assetFollowing is the formula table for computation ofweighted average returnFollowing is the computation of weighted See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Ayasha, age 30, is beginning to contemplate her financialfuture. Right now, she lives in a large city where she rents aone-bedroom apartment. Although she loves the excitement of thecity, she knows that someday she would like to move to the countryand live in a farmhouse. Her goal is to begin saving for thisobjective right away. Ayasha has identified three possibleportfolios that might be appropriate choices as she beginsinvesting to reach her objective. Each portfolio consists of thefollowing stocks, bonds, and cash assets.Portfolio 1Portfolio 2Portfolio 310% cash10% cash15% cash20% bonds40% bonds50% bonds70% stocks50% stocks35% stocksInstructions:Calculate the weighted average rate of return for eachportfolio, assuming that the average return of each asset is asfollows. (Hint: Multiply the allocation percentage by the rate ofreturn to determine the “weighted average” for the asset: stocks9%, bonds 4%, and cash assets 2%.) Which portfolio has the greatest level of uncertaintyassociated with the returns? How can you tell?If Ayasha?s risk tolerance is below average and she has along-time horizon (15 years), which of the three portfolios wouldbe most appropriate for her?If Ayasha?s time horizon for goal achievement is 4 years, whichportfolio would be most appropriate?What type of risk does Ayasha face if she invests in portfolio3?

Portfolio 1	Portfolio 2	Portfolio 3
10% cash	10% cash	15% cash
20% bonds	40% bonds	50% bonds
70% stocks	50% stocks	35% stocks