Answer Happy

You manage an equity fund, Panda Eyes, with an expected risk
premium of 10% and a standard deviation of 14%. The risk-free rate
is 6%. Your client chooses to invest £60,000 of their portfolio in
your equity fund and £40,000 in the risk-free rate.
(a) Discuss the historical record of government bonds and
stocks in the last 100 years. Compare both the historical riskiness
as well as their relative returns. Were there particular types of
stocks that did better than others?
(b) Calculate the expected return and standard deviation
of the return on your client’s portfolio.
(c) Calculate the Sharpe Ratio of the client’s
portfolio.
(d) The historical data on your other investment fund, the
Unethical Fund, is given in the table below. Calculate the
historical arithmetic and geometric average return of the fund.
year price 2018 £100 2019 £98 2020 £105 2021 £117
(e) Assume that the returns you calculated in (d) are
representative for the entire history of the Unethical fund.
Provide the best estimate of the price of the fund in 2011.