Share
Explore BrainMass

Constructing an Appropriate Portfolio.

You are the financial adviser to three individuals, a young person with high risk tolerance, a middle-aged person with medium risk tolerance and an old person with low risk tolerance. Here are the current conditions:

- Risk free asset earning 12 % per year
- Risky asset (or market portfolio) with expected return of 30% per year and standard deviation of 40%.

a. Construct an appropriate portfolio for your young client and estimate the expected return and standard deviation of your young client for the coming year.
b. Construct an appropriate portfolio for your middle aged client and estimate the expected return and standard deviation of your middle aged client.
c. Construct an appropriate portfolio for your old client and estimate the expected return and standard deviation of your old client.
d. If your middle aged client requires a portfolio with a standard deviation of 30%, what is its expected rate of return?

Solution Preview

Let's make some assumptions:

-the young client is ambitious, he is looking for ways aim for higher returns. Of course, young people are generally risk-loving, so they are willing to take more risks. Finally, the young client does not have a family, so he doesn't have mortgages or loans to take care of.

-the middle aged client is a bit less ambitious. He has mortgages and has to save for his kids' college tuitions and ...

$2.19