Based on your annual calculations of risk and return for each fund, construct a two assets portfolio that combines two funds with a correlation of 1 at different weights.
Investments: Delineating an Efficient Portfolio
After reading the case answer the following questions:
· Summarize briefly the case and define the decisions the investor is inquired to take.
· Based on your annual calculations of risk and return for each fund, construct a two assets portfolio that combines two funds with a correlation of 1 at different weights. Explain the shape of the line that connects all sets of portfolios.
· Construct a two assets portfolio that combines the two funds with the lowest correlation at different weights. Explain the shape of the line that connects all sets of portfolios.
· If the two lines demonstrated in the previous two points are not similar, explain the reasons behind this difference.
· Construct a covariance matrix. Based on that, you have to build a multiple asset portfolio, that includes all 10 funds. How can you reach the optimal risky portfolio? Noting that the risk-free rate is 8%.
· Analyze the effect of adding risk-free asset to your risky investments.