4 - Investment Portfolio Management - Assignment Example

on while a value of 4 suggests greater risk aversion Therefore, in this case the utility adjusted return needs to be calculated which is actually the market risk premium expected by the investor. The formula for calculating the utility adjusted return is as follows: Putting the values in the formula, the utility adjusted return is obtained to be 5.52% which is greater than the risk free rate. This return is adjusted for the risk borne by the investor and therefore is the expected market risk premium required by the investor. ii) The allocation between stocks and risk free assists will have to be done on the basis of the risk aversion coefficient of the investor.

In this case, the investor has a risk aversion score of A = 4; which suggest that the investor is more risk averse and thus will always choose to invest the majority proportion of the funds in less risky assets. Putting the values given above in the aforementioned formula we obtained the expected return of the portfolio to be 13.81% (refer to excel sheet for calculation). The standard deviation was calculated using the standard deviation formula in excel which provided a value of 0.034 for the current portfolio of the investor. iii) The underlying reason behind the inclusion of fund C is the fact that it has the highest expected return with the same standard deviation.

This suggests that an investor investing in fund C will realize greater returns by assuming the same degree of risk borne by an investor who invests in fund A. In addition, the correlation of returns with the current portfolio for fund C is the highest. This suggests that fund C best compliments the investor’s current portfolio. Therefore inclusion of fund C within the current portfolio would be an optimal choice. iv.) In order to calculate the expected portfolio return and standard deviation value of the newly formed portfolio which includes the index fund C alongside the previous stocks, the same formula that was applied while