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Probability and Returns

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Profitability and Returns.

The assignment requires that I consider whether this is a good investment, by comparing it with investing in a bond fund. I will need to graph the opportunity set, calculate the weights, expected returns, variance and standard deviation in the attached Excel spreadsheet. All answers must be entered into the gray cells, along with the formula showing all work and how the answer was derived.

Input area:

10-year annual return Standard deviation
Bledsoe Large Company Stock Fund 11.08% 26.73%
Bledsoe Bond Fund 8.15% 10.34%
Risk-free rate (historic) 2.76%

Correlation 0.16

Output area:

Weight of stock fund Portfolio E(R) "Portfolio standard
deviation"
0% 10.34%
10% 10.08%
20% 10.54%
30% 11.63%
40% 13.19%
50% 15.08%
60% 17.19%
70% 19.45%
80% 21.81%
90% 24.24%
100% 26.73%

Dominant portfolio:
Weight of stock fund 17.11%
Weight of bond fund 82.89%
Standard deviation 10.34%
Expected return

Minimum variance portfolio:
Weight of large cap stock fund 8.55%
Weight of bond fund 91.45%
Expected return
Variance 0.010155
Standard deviation 10.0774%

Sharpe optimal portfolio: (Using Solver)
Weight of large cap stock fund 15.79%
Sharpe ratio 0.570098

Weight of large cap stock fund 15.75%
Weight of bond fund 84.25%
Expected return
Standard deviation 10.2640%
Sharpe ratio

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Solution Summary

The solution does a great job of answering the question. The solution is brief and concise and very easy to follow along. All the steps are clearly shown and Excel formulas are provided so that the student can answer similar questions in the future. It can be easily understood by anyone with a basic understanding of the topic. Overall, an excellent solution.

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