Question

Which of the following issues least impacts the implementation negatively of a Mean Variance framework to create a in the real world?

Group of answer choices

A.Government bond or Treasury Bill rates provide a reasonable estimate of future risk free rates for a desired investment horizon.

B.The historical correlation between each asset in the portfolio is easy to calculate but estimating future correlation each asset and another asset in the portfolio is difficult to forecast

C.Some investments do not trade on a daily basis and should be dropped when constructing an asset allocation.

D.The historical return for each asset is easy to calculate but estimating future returns are difficult to forecast

E.Restricted investments, investments that are not accessible by investors from a certain market, should not be considered when constructing an asset allocation.

Answer 1

The issue that least impacts out of the given scenarios is A.

Other issues are the ones which are generally considered. Estimating future returns of an asset or the entire portfolio is chalenging. Hence B and D can impact decisions in real world. Even the fact that some investments are not traded and hence may not be liquid should be considered. For eample real estate properties . Hence, C is also an issue.

Further, certain investments might be restruited based on government regulations for local and FDI investments. Hence, should be carefully dealt with.

Comparing all this to A, which has become a standard practice leads us to the conclusion that the least impact is of estimating a Risk free return. Since government bonds are the least risky, they are used as a proxy for risk free return