Percival Hygiene Portfolio Combinations Risk and Return
Not what you're looking for?
Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio's expected annual rate of return is 9 percent, and the annual standard deviation is 10 percent.
Amanda Reckonwith, Percival's financial adviser, recommends that Percival consider investing in an index fund which closely tracks the Standard and Poor's 500 index. The index has an expected return of 14 percent, and its standard deviation is 16 percent.
A) Suppose Percival puts all his money in a combination of the index fund and Treasury bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 6 percent.
B) Could Percival do even better by investing equal amounts in the corporate bond portfolio and the index fund? The correlation between the bond portfolio and the index fund is +.1
Purchase this Solution
Solution Summary
This solution provides step-by-step calculations for the portfolio combinations for risk and return.
Solution Preview
Please see attached Excel file.
Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio's expected annual rate of return is 9 percent, and the annual standard deviation is 10 percent.
Amanda Reckonwith, Percival's financial adviser, recommends that Percival consider investing in an index fund which closely tracks the Standard and Poor's 500 index. The index has an expected return of 14 percent, and its standard deviation is 16 percent.
Return Standard deviation
Bond portfolio 9% 10%
Index fund 14% 16%
T Bill 6% 0% (T bill is risk free, therefore standard deviation is zero)
A) Suppose Percival puts all his money in a combination of the index fund and Treasury bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 6 percent.
Return Standard deviation
Bond portfolio 9% 10% ...
Purchase this Solution
Free BrainMass Quizzes
Business Ethics Awareness Strategy
This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.
Marketing Management Philosophies Quiz
A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.
Business Processes
This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.
Marketing Research and Forecasting
The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.
Lean your Process
This quiz will help you understand the basic concepts of Lean.