Question

Assume a HNWI that is invested 50-50 in stocks and bonds wants to allocate 30 percent of his current portfolio to hedge funds. His advisor suggests reallocating a portion of his equity investments to meet this objective. Assume the historical returns from stocks is 12 percent, bonds is 4 percent, and hedge funds are 10 percent, that the volatility of stocks is 12 percent, of bonds is 5 percent, and of hedge funds is 6 percent and that the correlation between stocks and bonds is .1, between stocks and hedge funds is .4, and between bonds and hedge funds is -.1. a. What is the original expected return and standard deviation? b. What is the new expected return and standard deviation? c. What is the old Sharpe ratio? d. What is the new Sharpe ratio? 

          Assume a HNWI that is invested 50-50 in stocks and bonds wants to allocate 30 percent of his current portfolio to hedge funds. His advisor suggests reallocating a portion of his equity investments to meet this objective. Assume the historical returns from stocks is 12 percent, bonds is 4 percent, and hedge funds are 10 percent, that the volatility of stocks is 12 percent, of bonds is 5 percent, and of hedge funds is 6 percent and that the correlation between stocks and bonds is .1, between stocks and hedge funds is .4, and between bonds and hedge funds is -.1.
a. What is the original expected return and standard deviation?
b. What is the new expected return and standard deviation? 
c. What is the old Sharpe ratio?
d. What is the new Sharpe ratio?
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Horngren’s Cost Accounting
Horngren’s Cost Accounting
Srikant M. Datar, Madhav V. Rajan 16th Edition
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Assume a HNWI that is invested 50-50 in stocks and bonds wants to allocate 30 percent of his current portfolio to hedge funds. His advisor suggests reallocating a portion of his equity investments to meet this objective. Assume the historical returns from stocks is 12 percent, bonds is 4 percent, and hedge funds are 10 percent, that the volatility of stocks is 12 percent, of bonds is 5 percent, and of hedge funds is 6 percent and that the correlation between stocks and bonds is .1, between stocks and hedge funds is .4, and between bonds and hedge funds is -.1. a. What is the original expected return and standard deviation? b. What is the new expected return and standard deviation? c. What is the old Sharpe ratio? d. What is the new Sharpe ratio?
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Transcript

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00:01 We know that expected returns as name suggests are returns which are expected to be earned.
00:07 Whereas standard deviation is the risk associated with the given portfolio.
00:12 Both are important for assessing a given portfolio.
00:16 Here in part a, we have to find the expected return of the portfolio.
00:25 Solving part a, we have to find the expected return of the portfolio which is calculated as e as.
00:34 Means expected return is equal to 0 .6 into es plus 0 .4 point into eb.
00:49 This is equal to 0 .6 into 10 plus 0 .4 into 8.
00:58 Solving this we will get 9 .2 % is the required value here.
01:06 Now we will solve part b.
01:15 Now we will find the variance of the portfolio.
01:19 Variance x is equal to 0 .6 square into variance of s plus 0 .4 square into variance of b plus 2 into 0 .2 into 0 .4 into 0 .6 into standard deviation of s into standard deviation of b.
01:51 This by putting the value you will get 0 .36 into 15 square plus 0 .16 into 12 .5 square plus 2 into 0 .2 into 0 .4 into 0 .6 into 15 into 12 .5.
02:17 Calculating this we will get 12 .4...
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