Extreme Events – Specimen Question A.5.1
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Question and Answer Summary
You are an asset allocator selecting between five different
asset categories A1 to A5 using mean-variance optimisation. Your expected
future returns, standard deviations of returns and correlations for the asset
categories are as follows:
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|
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Expected correlation
coefficients
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|
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Expected return (%pa)
|
Expected standard
deviation (%pa)
|
A1
|
A2
|
A3
|
A4
|
A5
|
|
A1
|
3.0
|
2
|
1
|
|
|
|
|
|
A2
|
5.0
|
4
|
0.4
|
1
|
|
|
|
|
A3
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6.0
|
8
|
-0.6
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-0.5
|
1
|
|
|
|
A4
|
7.0
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14
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0.0
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-0.4
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0.2
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1
|
|
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A5
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7.5
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15
|
-0.4
|
-0.4
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0.6
|
0.3
|
1
|
(a) Plot the
efficient frontier and the asset mixes making up the points along the efficient
frontier, assuming that risk-free is to be equated with zero volatility of
return and that no non-negative holdings are allowed for any asset category.
Answer/Hints
(b) Show how the efficient
frontier and the asset mixes making up the points along the efficient frontier
would alter if risk-free is equated with 50% in Asset A1 and 50% in Asset A2.
Answer/Hints
(c) In what
circumstances might a mixed minimum risk portfolio as per (b) apply? Give
examples of the types of asset that might then be A1 and A2.
Answer/Hints
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