In class we learned how to construct the optimal weights for the optimal portfolio

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

DATA NEEDED: Spreadsheet with Asset Class Indices and ETFs

1. In class we learned how to construct the optimal weights for the "optimal portfolio". Now, you will use this technique to construct a series of at least 10 points of returns and 10 standard deviations that represent the portfolios that have the lowest risk for that particular

return.

a. Present a table of all of your possible combinations with the average return of the portfolio, the risk, and the weights for each of your asset classes for both the INDICES and the ETFs separately.

b. Use these results to graph the efficient frontier with standard

deviation on the x-axis and average return on the y-axis. You should do a graph of both the ETF efficient frontier and the INDEX frontier in the same graph.

c. What do you see? Does it make sense to you the relationship between the ETF-frontier and the INDEX-frontier?

d. If you had to invest your money today, which point would you choose on the frontier? Why would you choose that point?

e. Suppose you have your efficient frontier, and you also know that average return of the Treasury bill (calculate from your risk-free return data). Does this change what portfolio you should invest in?

EXTRA CREDIT

f. Where does the equal-weight portfolios you designed in PS#3 fall in the diagram? Plot the points. Was it efficient?

Attachments:

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