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# WUSTL FIN 441 - Textbook Assignment 5

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Department of Finance Olin Business School Washington University in St. Louis Spring 2022 FIN 441-Investments Textbook Assignment 5 Due Mar 2nd, 2022 1. (Bodie, Kane & Marcus 2021, Chapter 7, Problem 2) When adding real estate to an asset allocation program that currently includes only stocks, bonds, and cash, which of the properties of real estate returns most affects portfolio risk? Explain. a. Standard deviation. b. Expected return. c. Covariance with returns of the other asset classes. 2. (Bodie, Kane & Marcus 2021, Chapter 7, Problem 4) A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 8%. The characteristics of the risky funds are as follows: Expected Return Standard Deviation Stock fund (S) 20% 30% Bond fund (B) 12% 15% The correlation between the fund returns is .10. What are the investment proportions in the minimum-variance portfolio of the two risky funds, and what are the expected value and standard deviation of its rate of return? 3. (Bodie, Kane & Marcus 2021, Chapter 7, Problem 9) A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund thatprovides a safe return of 8%. The characteristics of the risky funds are as follows: Expected Return Standard Deviation Stock fund (S) 20% 30% Bond fund (B) 12% 15% The correlation between the fund returns is .10. You require that your portfolio yield an expected return of 14%, and that it be efficient, that is, on the steepest feasible CAL. a. What is the standard deviation of your portfolio? b. What is the proportion invested in the money market fund and each of the two risky

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