Donald Rock is a fund-of-fund portfolio manager of the asset management company Capital Value Ltd. His...

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Finance

Donald Rock is a fund-of-fund portfolio manager of the assetmanagement company Capital Value Ltd. His company has a proprietarymodel to forecast the probability of different states of theeconomy and the corresponding returns from different funds.Consider the following information:
State of economy Probability Fund A Fund M Fund Z
Good 20% 15% 20% 35%
Normal 70% 10% 15% 20%
Bad 10% -3% -8% -15%
a. What are the expected return and standard deviation of hisportfolio if he chooses to invest 60% of his assets in Fund A, 30%in Fund M and 10% in Fund Z?
b. What are the expected return and standard deviation of hisportfolio if he chooses to invest equally in Fund A and Z?
c. If the economy turns out to be in a normal state, what willbe the expected return of his portfolio in part (a)?

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4.1 Ratings (468 Votes)

a Fund A Scenario Probability Return rate of return probability Actual return expected returnA A2 probability Good 02 15 3 53 00005618 Normal 07 10 7 03 63E06 Bad 01 3 03 127 00016129 Expected return sum of weighted return 97 SumVariance Fund A 000218 Standard deviation of Fund A Variance12 467 Fund M Scenario Probability Return rate of return probability Actual return expected returnA B2 probability Good 02 20 4 63 00007938 Normal 07 15 105 13 00001183 Bad 01 8 08 217 00047089 Expected return sum of weighted return 137 SumVariance Fund M 000562 Standard deviation of Fund M Variance12 75 Fund Z Scenario See Answer

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Donald Rock is a fund-of-fund portfolio manager of the assetmanagement company Capital Value Ltd. His company has a proprietarymodel to forecast the probability of different states of theeconomy and the corresponding returns from different funds.Consider the following information:State of economyProbabilityFund AFund MFund ZGood20%15%20%35%Normal70%10%15%20%Bad10%-3%-8%-15%a. What are the expected return and standard deviation of hisportfolio if he chooses to invest 60% of his assets in Fund A, 30%in Fund M and 10% in Fund Z?b. What are the expected return and standard deviation of hisportfolio if he chooses to invest equally in Fund A and Z?c. If the economy turns out to be in a normal state, what willbe the expected return of his portfolio in part (a)?

State of economy	Probability	Fund A	Fund M	Fund Z
Good	20%	15%	20%	35%
Normal	70%	10%	15%	20%
Bad	10%	-3%	-8%	-15%