Questions for Portfolio Management

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1、PreparedforJiaJia14/5/2014PortfolioManagement-HammondJoanHammond,CFA,managestheSpartaCorporation’spensionfund.Sherecentlypresentedherquarterlyreporttothefund’sboardoftrusteesandisrecommendingachangeinthefund’sassetallocation.Basedonhermarketexpectations,sherecommendsallocating30%ofassetstovaluest

2、ocks,50%togrowthstocks,and20%tobonds.Hammond’smarketexpectationsareshowninExhibit1.Exhibit1Hammond’sMarketExpectationsValueGrowthBondStockStockPortfolioPortfolioPortfolioExpectedannual12%14%8%returnExpectedstandarddeviationofannual16%22%8%returnsReturnCorrelationsValuestock1.00.90.3portfolioGrowt

3、hstock---1.00.2portfolioBondportfolio------1.0BoardmemberBenjaminDonnerisskepticalabouttherecommendedchangeinassetallocationforthepensionfundandhasseveralquestionsforHammond.HeasksHammondtodescribetherisk–returncharacteristicsofherrecommendedportfolio.Hammondresponds:“Ibelievetherecommendedasseta

4、llocationwillproduceaportfoliothatistheglobalminimum-varianceportfolio.Theglobalminimum-varianceportfoliohasthelowestlevelofriskcomparedwithallotherportfoliosontheefficientfrontier,andthusitalsodominatesallotherportfoliosontheefficientfrontier.”DonnerarguesthatHammondshouldconsiderbroadeningthedi

5、versificationofthefund’sportfoliointoa“fullydiversifiedportfolio”byaddingrealestateandinternationalstocks.Hestatesthattheseadditionswillimprovetheefficiencyofthefund.Donnerestimatesthefullydiversifiedportfoliowouldhaveanexpectedreturnof13%andastandarddeviationof15%.Hewouldthenfurtherexpandtheinve

6、stmentopportunitysetby2combiningtheproposedfullydiversifiedportfoliowitheitherrisk-freeborrowingorlending.Henotesthattheappropriaterisk-freerateofreturnis4%.Finally,DonnerrecommendsthatHammondincludeafundamentalfactormodelanalysisinfuturereports.Donnerstates:“Fundamentalfactormodelsrelateassetret

7、urnsbothtosurprisesinmacroeconomicvariablesandtocompanyattributes,suchasmarketcapitalization.”Hebelievessuchananalysiswillbebeneficialinmakingfutureassetallocationdecisions.Question1.UsingHammond’srecommendedassetalloc