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QUESTION 2 MONTHLY Expected Returns, Standard Deviations, and Correlations July 1990 through December 2014, 294 months, returns are...

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Finance

QUESTION 2

MONTHLY Expected Returns, Standard Deviations, andCorrelations July 1990 through December 2014, 294 months, returnsare total stock market returns for the region)

Correlation with:

Asset Class

Expected Return

Std. Deviation

US

Japan

Asia (non-Japan)

Europe

US

0.89%

4.34%

1.00

0.41

0.71

0.79

Japan

0.21%

5.97%

0.41

1.00

0.47

0.50

Asia (non-Japan)

0.96%

6.01%

0.71

0.47

1.00

0.75

Europe

0.74%

5.04%

0.79

0.50

0.75

1.00

4. Suppose you are currently invested 100% in U.S. stocks andyou CANNOT short:

A. Find the portfolio that maximizes expected return if you wantthe same risk of U.S. stocks.

B. What is the expected return of this portfolio and what arethe portfolio weights?

Answer & Explanation Solved by verified expert
4.3 Ratings (957 Votes)
Please refer to the excel sheet I attachedI have solved the above question using excel since manualcalculation would take too longIn the excel sheet first youcan write all the information given in the question as I did bymaking the asset tableThen to to calculate the weights for the portfolio which willgive you the maximum return with the risk the same as that of theUS asset classI created a weights table manually writing equal weights forall the asset classes and then calculating its square in the othercolumn for an easier calculationI also    See Answer
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Transcribed Image Text

QUESTION 2MONTHLY Expected Returns, Standard Deviations, andCorrelations July 1990 through December 2014, 294 months, returnsare total stock market returns for the region)Correlation with:Asset ClassExpected ReturnStd. DeviationUSJapanAsia (non-Japan)EuropeUS0.89%4.34%1.000.410.710.79Japan0.21%5.97%0.411.000.470.50Asia (non-Japan)0.96%6.01%0.710.471.000.75Europe0.74%5.04%0.790.500.751.004. Suppose you are currently invested 100% in U.S. stocks andyou CANNOT short:A. Find the portfolio that maximizes expected return if you wantthe same risk of U.S. stocks.B. What is the expected return of this portfolio and what arethe portfolio weights?

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