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Extreme Events – Specimen Question A.5.2

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A colleague has a client for which the mixed minimum risk portfolio as per A.5.1(b) applies. She has invested the client’s portfolio as follows:

 

 

Portfolio mix (%)

A1

20

A2

20

A3

20

A4

20

A5

20

 

(a)    You know that she has also used mean-variance optimisation techniques and adopted the same expected covariances as you would have done in A.5.1. What return assumptions might she have adopted when choosing her portfolio mix? Specify mathematically all possible sets of return assumptions she could have adopted and still reached this answer.

 

Answer/Hints

 

(b)   Suppose that she is just about to adjust her portfolio mix so that it includes no holding in A3 and with the amounts that were invested in A3 in the above table redistributed equally between the remaining four asset categories. What return assumptions might she be adopting when choosing her new portfolio mix? Can you specify mathematically all possible sets of return assumptions she could have adopted and still reached this answer?

 

Answer/Hints

 


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