Task

A. In worksheet Ex 1of the Excel file provided, model a two-asset portfolio and examine the risk and return characteristic of a two-asset portfolio – using the data provided. In this worksheet paste three graphs:

a. When correlation coefficient of returns between the assets is -1.0;

b. When the correlation is 0.5; and

c. when the correlation is1.0.

B. On worksheet Ex 2 construct an efficient multi asset portfolio of risky assets using the selected mutual funds in Exhibit 1 p.6 f the case.

C. Analyse the effect of adding a risk-free asset to a portfolio containing risky assets. Assume the risk-free rate is 8%.

D. Recommend an optimal portfolio that provides the highest return for the specified risk level with the constraint that:

i. The sum of the portfolio weights should equal.

ii. The weight of any risky asset in the portfolio should not exceed to ensure that the portfolio is diversified.

iii. No short selling or borrowing.

iv. Use the function of sample variance to calculate the variances of the fund returns. Do NOT use population variance.

E. Answer the quiz taking the required figures from your spreadsheet.

F. Write a report to the investor (assume this is the ‘Uncle’ as described in the case): discuss investor risk preferences and the implied risk profile of the uncle; explain the fundamental concepts behind the optimal portfolio of risky assets; explain how the addition of a risk-free asset in a portfolio was useful for generating a higher risk adjusted return; and finally make your recommendation.