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Asset Allocation and Risk Tolerance

Name______________________________

FINA 405

Asset Allocation and Risk Tolerance Worksheet

Please complete the following exercises and bring two copies to class the first night.

Exercise 1: Initial Portfolio Allocation

Part A): Assume that you have $1,000,000 to invest among the following three asset categories: U.S. equities, 30-year U.S. T-bonds, and one-year commercial bank certificates of deposit. You investment horizon is one year. Indicate below how you would allocate the money.

Asset

U.S. Equities (as proxied by the S&P 500)1

U.S. 30-Year Treasury Bonds2

Commercial Bank Certificate of Deposit3

Allocation

%

%

%

100%

1. More detailed information the Standard and Poor’s (S&P) composite index is available directly from Standard & Poor’s: http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,0,0,0,0,0,0,0.html Excel spreadsheets of Index returns are available by choosing a timeframe and clicking on the tab “EXPORT” at http://us.spindices.com/indices/equity/sp-500

Web-based finance sites also customarily carry data on the S&P 500. For example, –at Yahoo! Finance: http://finance.yahoo.com/q?s=%5EGSPC –at CNNMoney.com: http://money.cnn.com/data/markets/sandp/? –At MSN: http://moneycentral.msn.com/detail/stock_quote?Symbol=$INX

2. Historical data on 30-year U.S. Treasury bond yields on debt claims are available from the Federal Reserve at http://www.federalreserve.gov/releases/h15/data.htm. For Excel-based historical daily rates on the 30-year T-bond, defined as “Market yield on U.S. Treasury securities at 30-year constant maturity, quoted on investment basis” go to

http://www.federalreserve.gov/datadownload/Output.aspx?rel=H15&series=b56abb6d9cc35f28ccf86b8a0188e948&lastObs=&from=&to=&filetype=csv&label=include&layout=seriescolumn

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Long-bond Treasury rates are also available from the following sites: — http://www.reuters.com/finance/bonds — http://www.bloomberg.com/markets/rates/index.html

3. Assume the annual rate currently available on commercial bank CD is 1%.

Part B) : Identify three sources that you relied upon most heavily to assist you in your asset allocation decisions. Explain how each was useful to you in the table below.

Source

Usefulness

Exercise 2: Scoring Your Risk Tolerance

1. Locate and complete the Risk Tolerance questionnaire on pp. 44-45 of the textbook.

2. Calculate your total score based on the scoring rubric on p. 46 of the textbook:

_____ points

If you scored …… you may have:

0-11: No tolerance for risk

12-33: Low tolerance for risk

34-55: Below to average tolerance for risk

56 -77: Above average tolerance for risk

78-99: High tolerance for risk

100+: Very high tolerance for risk

Please circle the type of investor the rubric suggests you may be.

Exercise 3: Asset Allocation and Risk Tolerance

In one page or 250 words relate your asset allocation in Exercise 1 to your risk tolerance score in Exercise 2. Are the two consistent? Explain.