Question

Answer the following questions:

1. Explain the primary goal of portfolio diversification as it relates to asset allocation and correlation.

2. You are advising several individual investors who are interested in investing in portfolios comprised of both stocks and bonds. In preparation for meeting with these various investors, you plot the investment opportunity set for stocks and bonds. Given this information, why might you advise some of the investors to invest in a portfolio other than the minimum variance portfolio?

3. Foreign securities are generally considered to be more risky than domesticsecurities. Given assumption, explain how adding foreign securities into a domestic portfolio can affect the Markowitz efficient portfolios.

4. Explain the relationship between the security market line and market efficiency.

5. Identify and describe each of the three components of a security's expected return according to the capital asset pricing model.

6. Alfonso Rodriquez has served as the president of Imports United for the past six years. During his tenure, the company has grown significantly and provided above-average returns to its shareholders. Thus, Mr. Rodriquez is highly admired. Yesterday, he announced that he will be retiring at the end of this quarter. You expected the stock price of Imports United to decline on this news because of the admiration investors have for this gentleman. Contrary to your expectations, the price of the stock remained unchanged. There was no other relevant market news related to this firm and the overall market also remained relatively unchanged for the day. What explanation can be given for the market not reacting as you expected to Mr. Rodriquez's announcement?

7. Explain the similarities and differences between the Sharpe and Treynor ratios. Also, explain the most appropriate application for each.

8. Explain a key advantage and a key disadvantage of Jensen's alpha.

9. A conservative investor has a well-diversified portfolio but is still concerned about two things. First, he is concerned about the downside risk and secondly, he is concerned whether he is earning a sufficient rate of return to compensate for the total risk he is assuming. How could you quantify these concerns for this investor?

Solution Preview

This material may consist of step-by-step explanations on how to solve a problem or examples of proper writing, including the use of citations, references, bibliographies, and formatting. This material is made available for the sole purpose of studying and learning - misuse is strictly forbidden.

1. Explain the primary goal of portfolio diversification as it relates to asset allocation and correlation.

The primary goal of portfolio diversification is to lower the total risk of a portfolio without sacrificing expected return. The lower the correlation among the returns of securities within a portfolio, the better this goal is met. Individual securities tend to be more correlated with other securities within its asset class and less correlated with individual securities in other asset classes. For example, stocks tend to be highly positively correlated with other stocks, bonds tend to be highly positively correlated with other bonds (and inversely with interest rates), yet stock and bond returns are less positively correlated with each other. Therefore, a portfolio will be more broadly diversified across several asset classes than if it is comprised of securities within one or fewer asset classes....

This is only a preview of the solution. Please use the purchase button to see the entire solution

Related Homework Solutions

Business Questions
Homework Solution
$15.00
Business
Finance
Accounting
Gross Sales
Economy
Balance
Collection Policy
Customers
Payments
Credit Policy
Carrying Expenses
Average Values
Purchases
Implementing HJM model by Monte Carlo Simulation
Homework Solution
$400.00
Mathematics
Business
Finance
Monte Carlo Simulation
Excel Spreadsheet
Graphs
Heath Jarrow and Morton Model
Interest Rate
Principal Component Analysis
Pricing Hedge
Vanillas Options
UVM Models
England Bank Example
Mean-Variance Metrics and Financial Markets
Homework Solution
$53.00
Accounting
Business
Finance
Economics
Markowitz
Risk Management
Mean-Variance Metrics
Capital Rules
Leverage
Shadow Banking
US
Canada
Business Questions: Margin Purchase
Homework Solution
$33.00
Accounting
Business
Financial Management
Economics
Prices
Shares
Purchases
Percentage
General Widgets
Investments
Stock Market
Absolute Gain
Percentage Gain
Finance Questions
Homework Solution
$33.00
Finance
Business
Management
Stocks
Government
Money Market
Probability Distribution
Risk
Functions
Equations
Correlation
Proportions
Portfolio
Companies
T-Bill Rates
Percentage
CML
Data
NPV and IRR Calculation
Homework Solution
$43.00
Business
Finance
Company
Expansion
Equipment
Installation
Costs
Product Line
Revenue
Expense
Cash Flow
Tax
Return
Rate
Depreciation
NWC
NPV
IRR
Inflation
Get help from a qualified tutor
Live Chats