Question

INVESTING YOUR OWN PORTFOLIO

You have won the jackpot of a European Lottery with a prize of €30 000. After distributing a portion of the prize to a local charity, you decide that it is a good idea to invest the rest of the prize. However, you are doubtful about which asset class or financial vehicle is more suitable given the current international context.

Bear in mind that you are in your early twenties and that your financial restrictions are negligible. While you are Not a Risk Lover, you feel comfortable with a portfolio with a high risk-reward profile. You seek professional advice and contact two recognized investment advisors.     

Investment Advice Summary

You had a virtual meeting with each of advisor and then you summed-up their financial advices as follows:

	Advisor 1	Advisor 2
Percentage invested in Bonds	85%	40%
Percentage invested in Equity	15%	60%
Investment Vehicle	Mutual Funds	Exchange Traded Funds (ETF)
Geographic Exposure	European Funds only	Global ETFs
Currency Exposure	Unhedged	80% FX-hedging into your local currency
Liquidity	Low to Moderate	High
Portfolio management style	Active	Passive
Rebalancing Frequency	Every six months	Every two years

4. Portfolio with Two Risky Assets:

Sometimes you ask yourself if you should have relied on the Advisor #2. You found that Fidelity Investments offers a Passive Investment fund which is invested 40% in a global Bond ETF and 60% in a global Equity ETF. The covariance of both ETF Funds is 0.0069. The table below show the expected return and risk measures for each ETF.

Calculate the expected return and variance of the Passive Investment Fund. (5 points per each correct statistic; total of 10 points)

	Expected Rate of Return	Standard Deviation
Global Bond ETF	4.7%	6.1%
Global Equity ETF	15 %	23%

Answer 1

Answer:

a) Expected return of the Passive Investment Fund = 10.88%

b) Variance of the Passive Investment Fund = 2.29%

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