Question

In: Finance

Joyce Bromfield has $30,000 to invest for 5 years. She will allocate her money to government...

Joyce Bromfield has $30,000 to invest for 5 years. She will allocate her money to government Treasury Bills (T-Bills), mutual fund A, and mutual fund B as follows: $4,500 in T-bills; $13,500 in A and $12,000 in B. Fund A has a front-end fee of 5%, MER of 2% and no rear-end fee. Fund B has no front-end fee, MER of 2.5%, and rear-end fee of 5%. Assume that the appropriate discount rate to compare fund fees is 5%.

The expected rates of return and standard deviations of the funds are as follows:

Expected

Return (%)

Standard deviation (%)

A

10

20

B

13

25

T-bill

3

0

The correlation coefficients between A and B is 0.4 .

Answer:

  1. What is the expected rate of return of her portfolio?
  2. What is the standard deviation of her portfolio?
  3. If her portfolio’s return is normally distributed, what is the probability
  1. That she will lose money next year? (
  2. That she will earn at least 15% next year? (
  1. What is the annual fee of each of the funds, A and B, if she holds the funds for 6 years?  

Solutions

Expert Solution

Use a spreadsheet for the ease in computations. Enter the values and the formulas in the spreadsheet as shown in the image below.

The obtained result is provided below.

jeff jeffy answered 2 years ago
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