Part 2 

You are a manager of an investment fund. Your job is to advise clients on what portfolio best suits their needs, given their characteristics. You have three different customer types: 

I. A young person (Sue) with a long and successful career ahead of her. 

II. A middle-aged couple (John and Karren) who earn high incomes. They plan to retire in 10 years’ time. 

III. An older person (Rajesh) who is hoping to retire from work in the next 18 months. 

There are 3 different portfolio packages that you offer your clients: 

PORTFOLIO ALPHA: 80% shares; 10% property; 10% cash.   

PORTFOLIO BETA:    50% bonds; 10% shares; 40% property.  

PORTFOLIO GAMMA: 50% cash; 40% bonds; 10% property.         

Your task is to answer the following questions by referring to your textbook, other finance books, the media, the internet etc.: 

1. By using the information in TABLE 1: 

(a) Calculate the historical returns for each of the above portfolios for the years between 2003 and 2018. Present the answers/numbers in the table.  

(b) Calculate the expected (average) return, denoted by E(R), and risk (standard deviation), denoted by σ, for each of the four asset classes as well as those three portfolios. Present your answers in Table 1.   

The completed table SHOULD be submitted with your assignment. Students are encouraged to employ Microsoft Excel for these workings.   

2. Explain what is meant by diversifiable and non-diversifiable risk. Why are some risks non-diversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?

3. Explain why the beta of a security in a well diversified portfolio is a more appropriate measure of the risk of the security than the security's standard deviation.

4. Rajesh who wants to retire soon tells you that he has been advised by a friend not to invest in stocks that have high standard deviations. Is the friend’s advice sound for a risk-averse investor like Rajesh? Why or why not?

5. For each of the three customer types that you have, recommend the most suitable portfolio option and justify your choice. Use language here that the customers will understand. You should use a graph here to show the historical return performance of each of your portfolios to assist with your recommendation.