You are in risk manager in a major investment bank. The bank\'s current portfoli

Question

You are in risk manager in a major investment bank. The bank's current portfolio consists of US stocks (50%), bonds (20%), and derivatives (30%). The expected returns and standard deviations of these Investments are A trader conies up with an idea about putting some new investment in some new emerging markets: the markets of Polynesia, Micronesia, and New Caledonia. These markets have the following characteristics. Your job as risk manager is to determine how this investment would affect the overall risk of the bank's portfolio. Based on risk considerations alone (i.e.. trying to minimize the risk of your final portfolio), which of the three emerging markets is the best investment, assuming you would only invest in one of the three? How does your answer depend on the fraction of your overall portfolio you plan to invest in the new asset? Make sure you show all of your work.

Explanation / Answer

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