1. You are running an investment fund that is considering passively investing in

Question

1. You are running an investment fund that is considering passively investing in 5 different countries by buying an ETF for each country. You have put together the following expected returns, expected standard deviations and expected correlation coefficients Country E) Dev 20 23 .28 10 08 09 13 Correlation AB C DE C .2.25 D 4.35 .25 ?,5.3.4.25 (a) What is the highest portfolio expected return if you are required to have at least 10% in each ETF but not more than 30%? Explain. (b) Create a table showing the equally weighted () expected return and (ii) standard deviation for the portfolio under the following weights (i) 20% in each of the 5 ETFs (ii) All 10 pairwise portfolios (c) Draw a graph that shows the expected return and standard deviations of the 5 ETFS and the 11 portfolios from part (b) (d) If the risk-free rate is 2%, draw an approximate efficient frontier and find the exact expected return and standard deviation of the optimal portfolio

Explanation / Answer

Answer:

expected return on equity = 6% + 10% = 16%

expected return on portfolio = 0.6*16% + 0.4*11% = 14%

variance = (0.6*14%)^2 + (0.4*11%)^2 + 2*0.6*0.4*0.14*0.11*0.65

standard deviation = 11.75%

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