financial advisor is planning recommendations to a client who is planning for retirement on a twenty-year horizon

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

4. [25 points] A financial advisor is planning recommendations to a client who is planning for retirement on a twenty-year horizon. The annual amount that the client will need to save depends upon the rate of return to be expected on her existing portfolio, which is invested approximately 70% in equities (stocks) and 30% in bonds. The analyst has access to 50 years of past stock and bond market data. On these years of data, the sample mean of (after-inflation) annual returns in the stock market is computed as 4.5% per annum, and in the bond market 2.0%per annum. The variances of these annual percentage returns are 90 for stocks and20 for bonds. Assume first of all that returns on the two markets are statistically independent of each other.

The analyst will make recommendations on the assumption that future returns in each market will come from the same distribution as past returns and that returns are statistically independent of one year to the next.

a) Estimate the standard error of the mean annual return in each market.

b) Compute 95% confidence intervals for the mean annual return in each market.

c) Compute the estimated variance of the annual return (not the mean but just the annual percentage return) on the 70%-stocks, 30% equities portfolio, and also of an equally weighted (50-50) portfolio.

d) Find the minimum-variance portfolio (that is, find the weights that give a minimum for the estimated variance of the annual return on the portfolio, where the portfolio weights sum to 1) and interpret the result.

e) Now we will drop the assumption that returns on the two markets are statistically independent, and instead we will assume that the advisor has estimated the covariance between returns on the two markets as 0.4. How does the answer to

d) change? Explain the new result in contrast with that of part d).

Attachments:

Related Questions

. The fundamental operations of create, read, update, and delete (CRUD) in either Python or Java

CS 340 Milestone One Guidelines and Rubric  Overview: For this assignment, you will implement the fundamental operations of create, read, update,

. Develop a program to emulate a purchase transaction at a retail store. This  program will have two classes, a LineItem class and a Transaction class

Retail Transaction Programming Project  Project Requirements:  Develop a program to emulate a purchase transaction at a retail store. This

. The following program contains five errors. Identify the errors and fix them

7COM1028   Secure Systems Programming   Referral Coursework: Secure

. Accepts the following from a user: Item Name Item Quantity Item Price Allows the user to create a file to store the sales receipt contents

Create a GUI program that:Accepts the following from a user:Item NameItem QuantityItem PriceAllows the user to create a file to store the sales receip

. The final project will encompass developing a web service using a software stack and implementing an industry-standard interface. Regardless of whether you choose to pursue application development goals as a pure developer or as a software engineer

CS 340 Final Project Guidelines and Rubric  Overview The final project will encompass developing a web service using a software stack and impleme